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									     Case 5:03-cv-05642-JF      Document 235      Filed 07/10/2006     Page 1 of 43



 1   TERRY T. JOHNSON, State Bar No. 121569
     STEVEN D. GUGGENHEIM, State Bar No. 201386
 2   KRISTIN A. DILLEHAY, State Bar No. 187257
     CAMERON P. HOFFMAN, State Bar No. 229316
 3   MARK T. OAKES, State Bar No. 234598
     WILSON SONSINI GOODRICH & ROSATI
 4   Professional Corporation
     650 Page Mill Road
 5   Palo Alto, CA 94304-1050
     Telephone: (650) 493-9300
 6   Facsimile: (650) 565-5100
     Email: choffman@wsgr.com
 7

 8   Attorneys for Defendants KEVIN A.
     DENUCCIO, PIERRE R. LAMOND, THOMAS
 9   L. CRONAN III, VINOD KHOSLA, DENNIS P.
     WOLF, VIVEK RAGAVAN, DENNIS L.
10   BARSEMA, GAURAV GARG, WILLIAM H.
     KURTZ, CRAIG GENTNER, PROMOD
11   HAQUE and RANDALL KRUEP

12

13                              UNITED STATES DISTRICT COURT

14                           NORTHERN DISTRICT OF CALIFORNIA

15                                        SAN JOSE DIVISION

16   IN RE:                                         )   CASE NO.: C-03-5642 JF (HRL)
                                                    )
17   REDBACK NETWORKS, INC. SECURITIES              )   REDBACK DEFENDANTS’
     LITIGATION.                                    )   NOTICE OF MOTION AND
18                                                  )   MOTION TO DISMISS FOURTH
                                                    )   AMENDED CONSOLIDATED
19                                                  )   COMPLAINT; MEMORANDUM OF
        This Document Relates to:                   )   POINTS AND AUTHORITIES IN
20                                                  )   SUPPORT THEREOF
              ALL ACTIONS.                          )
21                                                  )   CLASS ACTION
                                                    )
22                                                  )   Date:          September 15, 2006
                                                    )   Time:          9:00 a.m.
23                                                  )   Courtroom:     3
                                                    )   Judge:         Hon. Jeremy Fogel
24                                                  )
                                                    )
25                                                  )

26

27

28
     REDBACK DEFS.’ NOTICE OF MOT. &                                 C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF                     Document 235                 Filed 07/10/2006                 Page 2 of 43



 1                                                      TABLE OF CONTENTS

 2                                                                                                                                          Page

 3   INTRODUCTION...........................................................................................................................2

 4   BACKGROUND.............................................................................................................................3

 5   ARGUMENT ..................................................................................................................................4

 6   I.        THE REFORM ACT IMPOSES STRICT REQUIREMENTS FOR PLEADING
               SECURITIES FRAUD........................................................................................................4
 7
     II.       PLAINTIFFS DO NOT ALLEGE AN ACTIONABLE FALSE STATEMENT...............5
 8
               A.         Plaintiffs Fail to Allege that Redback’s Financial Results Were False or
 9                        Misleading...............................................................................................................5

10             B.         Implicit Representations of Future Revenue Growth Are Not Actionable .............9

11   III.      PLAINTIFFS’ RULE 10B-5 AND SECTION 18 CLAIMS ARE TIME-BARRED .........9

12   IV.       PLAINTIFFS STILL FAIL TO PLEAD LOSS CAUSATION........................................12

13   V.        PLAINTIFFS FAIL TO ALLEGE FACTS SUPPORTING A STRONG
               INFERENCE OF FRAUDULENT INTENT....................................................................14
14
               A.         The Complaint Fails to Allege A Strong Inference of Scienter As to Any
15                        Redback Defendant ...............................................................................................14

16             B.         No Facts Are Alleged to Show that Any Redback Defendant Knew
                          Redback’s Accounting Was Improper ..................................................................15
17
               C.         No Facts Are Alleged to Show the Individual Defendants Knew Redback’s
18                        Disclosures Were Misleading................................................................................17

19                        1.         Messrs. Gentner, Lamond, Haque, Kurtz and Cronan ..............................17

20                        2.         Mr. Garg ....................................................................................................19

21                        3.         Mr. Ragavan ..............................................................................................19

22                        4.         Mr. Kruep ..................................................................................................22

23                        5.         Mr. Khosla.................................................................................................22

24                        6.         Mr. DeNuccio............................................................................................22

25                        7.         Mr. Barsema ..............................................................................................23

26                        8.         Mr. Wolf....................................................................................................24

27             D.         Plaintiffs’ Stock Sale Allegations Fail to Save the Complaints’ Otherwise
                          Deficient Scienter Allegations ..............................................................................25
28
     REDBACK DEFS.’ NOTICE OF MOT. &                                       -i-                            C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF                    Document 235                Filed 07/10/2006                Page 3 of 43



 1   VI.       DEFENDANTS ARE NOT LIABLE FOR STATEMENTS MADE BY OTHERS........27

 2             A.         The “Group Pleading” Presumption is Not Available Here..................................27

 3             B.         Plaintiffs Fail to Plead A “Primary Violation” With Respect to Mr. Kruep .........28

 4   VII.      NO CONTROLLING PERSON LIABILITY UNDER 20(a) ..........................................29

 5   VIII.     PLAINTIFFS FAIL TO STATE A CLAIM UNDER SECTION 18(a) ...........................29

 6   IX.       PLAINITFFS HAVE NOT STATED A CLAIM FOR INSIDER TRADING.................31

 7             A.         Plaintiffs Have Not Alleged a Predicate Violation of the Securities Laws...........31

 8             B.         Plaintiffs Do Not Have Standing to Bring a Claim of Insider Trading.................31

 9             C.         Plaintiffs Have Not Alleged a Claim for Insider Trading With Particularity .......33

10   X.        THIS ACTION SHOULD BE DISMISSED WITH PREJUDICE ...................................34

11   CONCLUSION .............................................................................................................................35

12

13

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15

16

17

18

19

20

21

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23

24

25

26

27

28
     REDBACK DEFS.’ NOTICE OF MOT. &                                     -ii-                          C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF                       Document 235                 Filed 07/10/2006                 Page 4 of 43



 1                                                    TABLE OF AUTHORITIES

 2                                                                                                                                        Page(s)

 3                                                                     CASES

 4   Argent Classic Convertible Arbitrage Fund L.P. v. Rite Aid Corp., 315 F. Supp. 2d
            666 (E.D. Pa. 2004) ...........................................................................................................29
 5
     Berry v. Valence Tech., Inc., 175 F.3d 699 (9th Cir. 1999) ....................................................10, 27
 6
     Buban v. O’Brien, No. C94-0331, 1994 WL 324093 (N.D. Cal. June 22, 1994) ...................32, 33
 7
     California Public Employees’ Ret. Sys. v. Chubb Corp., 394 F.3d 126 (3d Cir.
 8          2004)....................................................................................................................................7

 9   Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A, 511 U.S. 164
            (1994) ................................................................................................................................28
10
     City of Philadelphia v. Fleming Cos., 264 F.3d 1245 (10th Cir. 2001) ........................................15
11
     Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)...........................................12, 13, 14
12
     Gompper v. VISX, Inc., 298 F.3d 893 (9th Cir. 2002).............................................................15, 20
13
     Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999) ...................................................6, 26
14
     Hockey v. Medhekar, 30 F. Supp. 2d 1209 (N.D. Cal. 1998)..........................................................8
15
     Howard v. Everex Sys., Inc., 228 F.3d 1057 (9th Cir. 2000) ..................................................28, 30
16
     In re AST Research Sec. Litig., 887 F. Supp. 231 (C.D. Cal. 1995) .......................................31, 33
17
     In re Aldus Sec. Litig., [1992-1993 Transfer Binder] Fed. Sec. L. Rep. (CCH)
18           ¶ 97,376 (W.D. Wash. Mar. 1, 1993) ................................................................................32

19   In re American Cont’l Corp./Lincoln Sav. & Loan Sec. Litig., 794 F. Supp. 1424
            (D. Ariz. 1992) ..................................................................................................................30
20
     In re Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833 (N.D. Cal. 2000) ........................................27
21
     In re Caere Corp. Sec. Litig., 837 F. Supp. 1054 (N.D. Cal. 1993)................................................9
22
     In re Cirrus Logic Sec. Litig., 946 F. Supp. 1446 (N.D. Cal. 1996) .............................................17
23
     In re Convergent Techs. Sec. Litig., 948 F.2d 507 (9th Cir. 1991) .................................................9
24
     In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005)......................................................................6
25
     In re Digi Int’l, Inc. Sec. Litig., 6 F. Supp. 2d 1089 (D. Minn. 1998), aff’d, 14 Fed.
26          Appx. 714 (8th Cir. 2001) .................................................................................................30

27   In re E.Spire Commc’ns, Inc. Sec. Litig., 127 F. Supp. 2d 734 (D. Md. 2001) ............................26

28   In re Exxon Mobil Corp. Sec. Litig., 387 F. Supp. 2d 407 (D.N.J. 2005) .....................................11
     REDBACK DEFS.’ NOTICE OF MOT. &                                        -iii-                           C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF                       Document 235                 Filed 07/10/2006                 Page 5 of 43



 1   In re Flag Telecom Holdings, Ltd. Sec. Litig., 308 F. Supp. 2d 249 (S.D.N.Y 2004) ..................18

 2   In re FVC.com Sec. Litig., 136 F. Supp. 2d 1031 (N.D. Cal. 2000) , aff’d, 32 Fed.
            Appx. 338 (9th Cir. 2002) .................................................................................................14
 3
     In re Fritz Cos. Sec. Litig., 282 F. Supp. 2d 1105 (N.D. Cal. 2003).............................................34
 4
     In re Genentech, Inc. Sec. Litig., No. C-88-4038, 1989 WL 106834 (N.D. Cal. July
 5          7, 1989)........................................................................................................................29, 30

 6   In re Gilead Scis. Sec. Litig., No. C03-4999, 2006 WL 1320466 (N.D. Cal. May 12,
            2006)..................................................................................................................................34
 7
     In re GlenFed, Inc. Sec. Litig., 60 F.3d 591 (9th Cir. 1995) ...................................................27, 28
 8
     In re Harmonic Inc. Sec. Litig., 163 F. Supp. 2d 1079 (N.D. Cal. 2001) .....................................28
 9
     In re Harmonic Inc. Sec. Litig., [2002-2003 Transfer Binder] Fed. Sec. L. Rep.
10          (CCH) ¶ 92,246 (N.D. Cal. Nov. 13, 2002) ........................................................................9

11   In re ICN Pharm., Inc. Sec. Litig., 299 F. Supp. 2d 1055 (C.D. Cal. 2004) ...................................8

12   In re Infonet Services Corp. Sec. Litig., 310 F. Supp. 2d 1106 (C.D. Cal. 2003) .........................12

13   In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248 (N.D. Cal. 2000) ........................25

14   In re MicroStrategy Inc. Sec. Litig., 115 F. Supp. 2d 620 (E.D. Va. 2000)............................32, 33

15   In re NAHC, Inc. Sec. Litig., 306 F.3d 1314 (3d Cir. 2002) .........................................................11

16   In re Network Assoc., Inc., Sec. Litig., No. C 99-01729, 2000 WL 33376577 (N.D.
            Cal. Sept. 5, 2000) ...............................................................................................................8
17
     In re Northpoint Commc’ns Group, Inc. Sec. Litig., 184 F. Supp. 2d 991 (N.D. Cal.
18          2001)....................................................................................................................................7

19   In re Oak Tech. Sec. Litig., No. 96-20552, 1997 WL 448168 (N.D. Cal. Aug. 1,
            1997)..................................................................................................................................28
20
     In re Pacific Gateway Exch. Inc. Sec. Litig., 169 F. Supp. 2d 1160 (N.D. Cal. 2001) ...............7, 8
21
     In re Peerless Sys. Corp. Sec. Litig., 182 F. Supp. 2d 982 (S.D. Cal. 2002) ..................................8
22
     In re Peritus Software Servs., Inc. Sec. Litig., 52 F. Supp. 2d 211 (D. Mass. 1999) ......................8
23
     In re Portal Software, Inc. Sec. Litig., No. C-03-5139, slip op. (N.D. Cal. Aug. 10,
24          2005)....................................................................................................................................6

25   In re Read-Rite Corp., 335 F.3d 843 (9th Cir. 2003) ........................................................14, 18, 21

26   In re Read-Rite Corp. Sec. Litig., 115 F. Supp. 2d 1181 (N.D. Cal. 2000), aff’d, 335
             F.3d 843 (9th Cir. 2003)....................................................................................................26
27
     In re Seagate Tech. II Sec. Litig., C-89-2493, 1990 WL 134963 (N.D. Cal. June 19,
28           1990), aff’d, 98 F. 3d 1346 (9th Cir. 1996) .......................................................................33
     REDBACK DEFS.’ NOTICE OF MOT. &                                        -iv-                            C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF                      Document 235                Filed 07/10/2006                 Page 6 of 43



 1   In re Secure Computing Corp. Sec. Litig., 120 F. Supp. 2d 810 (N.D. Cal. 2000).........................8

 2   In re SeeBeyond Techs. Corp. Sec. Litig., 266 F. Supp. 2d 1150 (C.D. Cal. 2003)........................8

 3   In re Segue Software, Inc. Sec. Litig., 106 F. Supp. 2d 161 (D. Mass. 2000).................................7

 4   In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999) ..........................5, 14, 25, 26

 5   In re Software Toolworks Inc. Sec. Litig., 50 F.3d 615 (9th Cir. 1994)........................................28

 6   In re Stone & Webster, Inc., Sec. Litig., 253 F. Supp. 2d 102 (D. Mass. 2003) ...........................29

 7   In re Stratus Computer, Inc. Sec. Litig., CIV. A. 89-2075, 1992 WL 73555 (D.
             Mass. Mar. 27, 1992) ........................................................................................................32
 8
     In re Suprema Specialties, Inc. Sec. Litig., 334 F. Supp. 2d 637 (D.N.J. 2004), aff’d
 9           in relevant part, reversed on other grounds, 438 F.3d 256 (3d Cir. 2006).......................30

10   In re Vantive Corp. Sec. Litig., 283 F.3d 1079 (9th Cir. 2002)..............................................passim

11   In re VeriFone Sec. Litig., 11 F.3d 865 (9th Cir. 1993) ................................................................31

12   In re VeriFone Sec. Litig., 784 F. Supp. 1471 (N.D. Cal. 1992), aff’d, 11 F.3d 865
             (9th Cir. 1993) .............................................................................................................31, 33
13
     In re VeriSign Corp. Sec. Litig., No. C 02-02270 JW, slip op. (N.D. Cal. Apr. 6,
14          2006)............................................................................................................................13, 14

15   In re Versant Object Tech. Corp. Sec. Litig., No. C 98-00299, 2000 WL 33960105
            (N.D. Cal. May 18, 2000)..................................................................................................26
16
     In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994)................................................17
17
     Lipton v. PathoGenesis Corp., 284 F.3d 1027 (9th Cir. 2002) .....................................................25
18
     Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993)..................................................................31, 33
19
     Newton v. Uniwest Fin. Corp., 802 F. Supp. 361 (D. Nev. 1990), aff’d, 967 F.2d
20         340 (9th Cir. 1992) ............................................................................................................17

21   Osher v. JNI Corp., 256 F. Supp. 2d 1144 (S.D. Cal. 2003)...........................................................8

22   Ravens v. Iftikar, 174 F.R. D. 651 (N.D. Cal. 1997).......................................................................3

23   Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) ................................................................4, 14, 25

24   SEC v. Truong, 98 F. Supp. 2d 1086 (N.D. Cal. 2000).................................................................34

25   Schuster v. Symmetricom, Inc., [2000-2001 Transfer Binder] Fed. Sec. L. Rep.
            (CCH) ¶ 91,206 (N.D. Cal. Aug. 1, 2000), aff’d, 35 Fed. Appx. 705 (9th
26          Cir. 2002) ..........................................................................................................................25

27   Shurkin v. Golden State Vintners, Inc., C O4-3434, 2005 WL 1926620 (N.D. Cal.
            Aug. 10, 2005)...................................................................................................................33
28
     REDBACK DEFS.’ NOTICE OF MOT. &                                       -v-                            C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF                      Document 235                 Filed 07/10/2006                 Page 7 of 43



 1   Simpson v. AOL Time Warner, Inc., -- F.3d --, 2006 WL 1791042 (9th Cir. June 30,
           2006)..................................................................................................................................29
 2
     Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004).....................27
 3
     Sterlin v. Biomune Sys., 154 F.3d 1191 (10th Cir. 1998)..............................................................12
 4
     United States v. Smith, 155 F.3d 1051 (9th Cir. 1998) .................................................................34
 5
     Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998) ....................................................26
 6
                                                                   STATUTES
 7

 8   15 U.S.C. § 78r(c) .........................................................................................................................10

 9   15 U.S.C. § 78(r) ...........................................................................................................................29

10   15 U.S.C. § 78t-1(a) ......................................................................................................................31

11   15 U.S.C. § 78u-4(b)(1)(B) .............................................................................................................5

12   15 U.S.C. § 78u-4(b)(2) ............................................................................................................5, 14

13   15 U.S.C. § 78u-4(b)(3)(A) .............................................................................................................6

14   28 U.S.C. § 1658(b) ......................................................................................................................10

15                                                                    RULES

16
     17 C.F.R. § 240.10b-5(a)...............................................................................................................28
17
     17 C.F.R. § 240.10b-5(b) ..............................................................................................................28
18
     17 C.F.R. § 240.10b-5(c)...............................................................................................................28
19

20                                                          MISCELLANEOUS

21   Stuart M. Grant & Megan D. McIntyre, Class Certification and Section 18 of the
            Exchange Act, 35 The Review of Securities & Commodities Regulation: An
22          Analysis of Current Laws & Regulations Affecting the Securities & Futures
            Industries (2002) ...............................................................................................................30
23
     Stuart M. Grant, The Institutional Investor’s Silver Bullet for Financial Fraud -
24          Section 18, 1136 PLI/Corp 377, 384 (1999) .....................................................................30

25   RESTATEMENT (SECOND) OF TORTS § 548A, cmt. b (1999) ..........................................................13

26

27

28
     REDBACK DEFS.’ NOTICE OF MOT. &                                       -vi-                           C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF          Document 235        Filed 07/10/2006       Page 8 of 43



 1                       NOTICE OF MOTION AND MOTION TO DISMISS

 2          TO PLAINTIFFS AND THEIR ATTORNEYS OF RECORD: NOTICE IS HEREBY

 3   GIVEN that on September 15, 2006, at 9:00 a.m., or as soon thereafter as the matter may be

 4   heard, in the courtroom of the Honorable Jeremy Fogel, United States District Court, San Jose,

 5   California, defendants Kevin A. DeNuccio, Pierre R. Lamond, Thomas L. Cronan III, Vinod

 6   Khosla, Dennis P. Wolf, Vivek Ragavan, Dennis L. Barsema, Gaurav Garg, William H. Kurtz,

 7   Craig Gentner, Promod Haque and Randall Kruep (“Defendants”) will, and hereby do, move the

 8   Court pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private

 9   Securities Litigation Reform Act of 1995 (the “Reform Act”), 15 U.S.C. § 78u-4, et seq., for an

10   order dismissing with prejudice plaintiffs’ Fourth Amended Consolidated Complaint, filed May

11   19, 2006 (the “Complaint” or “FAC”).

12          This motion to dismiss is based on this Notice of Motion and Motion to Dismiss; the

13   Memorandum of Points and Authorities (contained herein); the Declaration of Cameron P.

14   Hoffman, together with accompanying exhibits; the [Proposed] Order; all pleadings and papers

15   filed herein; oral argument of counsel; and any other matter that may be submitted at the hearing.

16                      ISSUES TO BE DECIDED (Civil Local Rule 7-4(a)(3))

17          1.      Have plaintiffs alleged an actionable false statement?

18          2.      Are plaintiffs’ claims time barred?

19          3.      Have plaintiffs adequately pleaded loss causation?

20          4.      Have plaintiffs alleged with particularity facts giving rise to a strong inference

21   that the challenged statements were made with requisite scienter?

22          5.      Have plaintiffs shown defendants can be liable for statements they did not make?

23          6.      Does the complaint state a claim under Section 18(a), Section 20(a) or Section

24   20A of the Securities Exchange Act of 1934 (the “Exchange Act”)?

25          7.      As this is plaintiffs’ fifth unsuccessful attempt to state a claim, should this action

26   be dismissed with prejudice?

27

28
     REDBACK DEFS.’ NOTICE OF MOT. &                   -1-                   C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF         Document 235         Filed 07/10/2006       Page 9 of 43



 1                       MEMORANDUM OF POINTS AND AUTHORITIES

 2                                           INTRODUCTION

 3          This case is a relic of the telecommunications crash in early 2001. Redback – a telecom

 4   company – went public in mid-1999 and Redback’s stock price soared with the boom in late

 5   1999 and into 2000. When the telecom industry crashed, Redback’s stock price crashed right

 6   along with it. Later, in 2003, when Redback was forced to enter into a pre-packaged bankruptcy

 7   to get back on track, disgruntled investors sought to blame their dotcom bust losses on a myriad

 8   of current and former Redback directors and officers. Despite numerous prior opportunities to

 9   amend their pleadings, plaintiffs cannot state a viable claim for securities fraud.

10          First, plaintiffs have not alleged any actionable false statement because there are no facts

11   that plaintiffs can offer to show that any of Redback’s financial statements were materially

12   inaccurate. Additionally, plaintiffs’ claim that Redback’s accurate reporting of product sales

13   created an “illusion” of ongoing demand is not actionable as a matter of law.

14          Second, plaintiffs’ claims are time-barred. In an effort to explain how their losses were

15   caused by an allegedly fraudulent scheme that they previously asserted was not disclosed until

16   November 2003, plaintiffs now allege that the truth about Redback’s allegedly fraudulent

17   scheme “started to become known” by the market by June of 2001 – well over two years before

18   the first complaints were filed in December of 2003.

19          Third, plaintiffs have again failed to plead loss causation. In an effort to avoid the statute

20   of limitations bar, plaintiffs simultaneously allege that the truth about defendants’ allegedly

21   fraudulent scheme started to become known, yet remained hidden, in the spring/summer of 2001.

22   Because of the latter contention, plaintiffs have disclaimed a causal connection between any

23   disclosures made during that time and the loss plaintiffs purportedly suffered. The only other

24   disclosure upon which a claim for loss causation could be based occurred in late 2003, had no

25   effect on the stock price, and came after Redback’s stock had already lost nearly all of its value.

26          Fourth, plaintiffs still fail to allege any particularized facts supporting a strong inference

27   of scienter because plaintiffs can offer nothing to show any defendant knew Redback’s financial

28   statements were materially false (they were not) or knew or was deliberately reckless in not
     REDBACK DEFS.’ NOTICE OF MOT. &                   -2-                   C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF        Document 235        Filed 07/10/2006      Page 10 of 43



 1   knowing, when he spoke to the market about Redback’s sales, that investors would be deceived

 2   about those sales unless all other transactions with the purchasing company were also discussed.

 3          Lastly, plaintiffs remaining ‘kitchen sink’ claims are mere boilerplate, unsupported by

 4   any substantive factual allegations and riddled with pleading deficiencies.

 5          Plaintiffs have now had five unsuccessful opportunities to state a viable claim. A sixth

 6   attempt cannot cure the fatal defects in their complaint. Dismissal with prejudice is appropriate.

 7                                           BACKGROUND

 8          Redback makes telecommunications equipment designed to facilitate high-speed

 9   broadband telecommunications and Internet services. ¶¶ 43, 44. 1 Over the four year Class

10   Period, from November 27, 1999 through October 10, 2003, Redback’s stock price followed the

11   rise and fall of the Internet and telecommunications bubble. ¶ 101. Shortly after the beginning

12   of the Class Period, on November 29, 1999, Redback’s stock was trading at $150 per share. ¶

13   65. A year or so later, the stock had lost half its value. ¶ 192. By October 10, 2003, the last day

14   of the Class Period, Redback’s stock price was $0.55. See Ex. A. 2 Ultimately, on November 3,

15   2003, Redback was forced to file a pre-packaged bankruptcy plan of reorganization. ¶ 124.

16          Plaintiffs allege that in April 2001, Redback “began to condition the market to an absence

17   of new deals and a loss of revenue from the Company’s biggest customer [Qwest and]

18   foreshadow[ed] that the Company expected lower first quarter revenues.” ¶ 219. Plaintiffs

19   allege that by June 2001, the market knew that Redback’s overall revenues were declining and

20   that Qwest in particular had reduced its purchases from Redback. ¶ 452 (a). According to

21   plaintiffs, however, the market did not understand the real reason for the declining revenues: the

22   Company blamed the decline in its fortunes on the overall decline in the telecommunications

23
        1
24       Citations to “¶ __” are to the Fourth Amended Consolidated Complaint, filed May 19,
     2006.
25
        2
          Unless otherwise noted, all exhibits are attached to the accompanying declaration of
26   Cameron P. Hoffman, dated July 10, 2006. The Court may take judicial notice of Redback's
     Stock price pursuant to Rule 201 of the Federal Rules of Evidence. See Ravens v. Iftikar, 174
27   F.R.D. 651, 661 (N.D. Cal. 1997) (taking judicial notice of stock prices on NASDAQ).

28
     REDBACK DEFS.’ NOTICE OF MOT. &                  -3-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
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 1   industry whereas, with respect to at least Qwest, it was purportedly buying fewer products

 2   because Redback was no longer engaging in illicit quid pro quo deals with that Company. Id.;

 3   see also ¶¶ 219, 234. Plaintiffs say it was not until a November 24, 2003 Denver Post article

 4   “exposed Redback’s fraudulent course of business and quid pro quo transactions with Qwest that

 5   investors had reason to know why Redback’s stock price had been artificially inflated.” ¶ 314;

 6   see also ¶ 126.

 7          Three weeks after publication of the Denver Post article, disappointed investors in then-

 8   bankrupt Redback sought to recoup their “tech bubble” investment losses by filing securities

 9   fraud suits against Redback’s current and former officers and directors. The present Complaint

10   asserts claims against (a) two former CEOs and one current CEO of the Company (Barsema,

11   Ragavan and DeNuccio, respectively); (b) two former CFOs and one current CFO (Gentner,

12   Wolf and Cronan); (c) a Vice President of World-wide Sales (Kruep); and (d) five current or

13   former members of Redback’s Board of Directors (Garg, Lamond, Khosla, Kurtz and Hague).

14          Plaintiffs assert claims under Section 10(b) of the Exchange Act and Rule 10b-5

15   promulgated thereunder (hereafter the “Rule 10b-5 claim”) against all of the defendants, claims

16   against certain defendants for insider trading, claims under Section 18 of the Exchange Act

17   against PricewaterhouseCoopers LLP and every individual defendant except Mr. Kruep, and

18   control person liability under Section 20(a) against all of the individual defendants.

19          This is the fifth time plaintiffs have attempted to state a claim for securities fraud. As

20   shown below, plaintiffs’ Complaint should be dismissed, this time with prejudice.

21                                              ARGUMENT

22   I.     THE REFORM ACT IMPOSES STRICT REQUIREMENTS FOR PLEADING
            SECURITIES FRAUD
23

24          In order to “eliminate abusive securities litigation” and “the practice of pleading ‘fraud

25   by hindsight,’” the Reform Act “significantly altered pleading requirement in private securities

26   fraud litigation.” In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1084-85 (9th Cir. 2002)

27   (citations omitted); Ronconi v. Larkin, 253 F.3d 423, 428 (9th Cir. 2001) (purpose of the Reform

28   Act is to “filter out” meritless claims). The Act “erect[s] procedural barriers to prevent plaintiffs
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 1   from asserting baseless securities fraud claims.” In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d

 2   970, 977 (9th Cir. 1999).

 3          These barriers include the requirement that the complaint “specify each statement alleged

 4   to have been misleading [and] the reason or reasons why the statement is misleading.” 15 U.S.C.

 5   § 78u-4(b)(1)(B). For allegations pled on information and belief, the complaint must “state with

 6   particularity all facts on which [the plaintiffs’] belief is formed.” Id. The Reform Act also

 7   establishes a stringent standard for pleading scienter, or intent. The complaint must “state with

 8   particularity facts giving rise to a strong inference” that each defendant acted with fraudulent

 9   intent. 15 U.S.C. § 78u-4(b)(2). Finally, the Reform Act provides that if the complaint does not

10   comply with these pleading requirements, it “shall” be terminated at the pleading stage. 15

11   U.S.C. § 78u-4(b)(3)(A).

12   II.    PLAINTIFFS DO NOT ALLEGE AN ACTIONABLE FALSE STATEMENT

13          As with their prior complaint, plaintiffs seem to allege both that Redback’s revenues were

14   inflated by the purportedly illicit transactions with Qwest and that, as a result of those

15   transactions, the market was misled into believing that demand for Redback’s products was

16   strong. In neither case does the Complaint plead an actionable false statement. Although this

17   Court previously found that it was “satisfied that Plaintiffs have provided the basis for their

18   belief that those [illicit] transactions occurred,” because the Court dismissed on loss causation

19   grounds, it did not decide whether plaintiffs had alleged an actionable false statement. Order

20   Dismissing Third Amended Consolidated Complaint, entered March 20, 2006 (“Order”) at 10.

21          A.      Plaintiffs Fail to Allege that Redback’s Financial Results Were False or
                    Misleading
22

23          Although this Court previously held that “[t]his is not a case in which revenue was

24   realized improperly or in which accounts had to be restated” (Order at 11), plaintiffs continue to

25   assert Redback fraudulently recognized revenue. In particular, plaintiffs continue to allege that,

26   by reason of alleged related transactions between Redback and Qwest, Redback’s net revenues

27   were artificially inflated and Redback’s income was overstated. See, e.g., ¶¶ 151, 158, 163, 174,

28   186, 187, 215, 230, 239, 249, 284, 291, 347. Yet plaintiffs allege no new facts in support of this
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 1   conclusion. Instead, the allegations regarding the supposedly fraudulent revenue recognition are

 2   unchanged from the version of the Complaint previously dismissed by this Court. Compare ¶¶

 3   323-350 with First Amended Consolidated Complaint, filed May 27, 2005, ¶¶ 317-344.

 4          Plaintiffs have not pleaded that Redback fraudulently recognized revenue in any event. It

 5   is not enough to merely allege that Redback’s financial statements “were materially false and

 6   misleading as a result of GAAP violations.” ¶¶ 152, 216, 250, 261, 285. Instead, when pleading

 7   GAAP violations based on improper revenue recognition, plaintiffs are required to plead basic

 8   details such as “‘the approximate amount by which revenues and earnings were overstated;’”

 9   “‘the products involved in the contingent transaction;’” the “‘dates of any of the transactions;’”

10   or the “‘identities of any of the customers or [company] employees involved.’” In re Daou Sys.,

11   Inc., 411 F.3d 1006, 1016 (9th Cir. 2005) (quoting, inter alia, Greebel v. FTP Software, Inc., 194

12   F.3d 185, 204 (1st Cir. 1999)); Vantive, 283 F.3d at 1091. Although each detail is not required,

13   plaintiffs must allege sufficient information to determine the extent and impact of the violation.

14   Daou, 411 F.3d at 1017; In re Portal Software, Inc. Sec. Litig., No. C-03-5139, slip op. at 16

15   (N.D. Cal. Aug. 10, 2005). As the Ninth Circuit has made clear, “‘a general allegation that the

16   practices at issue resulted in a false report of company earnings is not a sufficiently particular

17   claim of misrepresentation.’” Daou, 411 F.3d at 1016 (quoting Greebel, 194 F.3d at 203-04).

18          Here, plaintiffs fail to plead sufficient facts about the accounting behind the alleged

19   improper revenue recognition. While plaintiffs purport to offer factual allegations about various

20   transactions with Qwest and other companies, 3 plaintiffs never allege how Redback actually

21   accounted for any of the transactions. See generally ¶¶ 323-350. Instead, plaintiffs plead only

22
        3
23        In addition to the claims regarding transactions with Qwest, plaintiffs also attempt to again
     allege claims based on purportedly related transactions with Broadband Office (¶¶ 70-71),
24   UUNET (¶¶ 92, 344) and Williams Communications Group (¶¶ 113-115) and for IPR&D costs
     associated with Redback’s acquisitions of Siara and Abatis (¶¶ 326-328). Plaintiffs also allege --
25   in completely circular, bootstrap fashion -- that Redback failed to establish sufficient reserves for
     potential securities fraud liability arising from the types of claims that are asserted in this action.
26   ¶ 347. The factual allegations supporting these claims are even less particularized than the
     Qwest allegations and fail for the same reasons, described herein, that the allegations regarding
27   the Qwest transactions fail.

28
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 1   how Redback “should have” recorded revenue for each of the transactions (e.g., ¶ 341), without

 2   ever saying how Redback actually did account for the transactions or even alleging that Redback

 3   did not in fact apply the accounting treatment proposed by plaintiffs. In the absence of any

 4   allegations regarding Redback’s accounting, plaintiffs have clearly failed to allege – as they must

 5   – the amount by which Redback’s revenues were purportedly overstated. See Vantive, 283 F.3d

 6   at 1091 (“no sufficient allegation of the amounts by which revenues were allegedly overstated”);

 7   In re Segue Software, Inc. Sec. Litig., 106 F. Supp. 2d 161, 168 n.13 (D. Mass. 2000) (dismissing

 8   notwithstanding restatement; complaint failed to “specify the dates of the sales, the number of

 9   sales, the amounts involved, whether any items were returned, the return amount, how Segue

10   handled the accounting adjustment, or the identities of any Segue personnel involved”). 4

11          Plaintiffs also fail to allege with particularity any other facts supporting their claim that

12   Redback’s revenue recognition was wrong. Plaintiffs still do not, and cannot, allege that

13   Redback restated any of its financial statements. Plaintiffs still do not identify any person that is

14   alleged to have been a member of the finance and accounting department, and thus would be

15   presumed to have had first-hand knowledge of the Company’s actual accounting decisions. And,

16   plaintiffs still do not allege the contents of any document reflecting any improper accounting. As

17   in earlier versions of the Complaint, plaintiffs allege no facts to support their speculation that the

18   Company failed to follow proper accounting principles. See In re Northpoint Commc’ns Group,

19   Inc. Sec. Litig., 184 F. Supp. 2d 991, 1000 (N.D. Cal. 2001) (allegation that “‘PSN constantly

20

21

22

23
        4
           See In re Pacific Gateway Exch. Inc. Sec. Litig., 169 F. Supp. 2d 1160, 1166 (N.D. Cal.
24   2001) (dismissing accounting claim; plaintiffs “do not identify particular transactions where
     defendants improperly recognized revenues, nor do they provide details concerning the amount
25   by which bandwidth or undersea cable assets, revenues, and earnings were overstated; the dates
     of the transactions; or the details of the specific entries in the reports that are alleged to have
26   been made in error”); California Public Employees’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 153
     (3d Cir. 2004) (affirming dismissal where plaintiffs provide no “particulars regarding the amount
27   by which reserves were distorted, or how much revenue was improperly recognized”).

28
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 1   stalled and disputed their bills’” is insufficient; “But at what time did they refuse? Which bills

 2   did they refuse to pay? How does the witness know?”). 5

 3          Moreover, the facts plaintiffs allege undermine their assertion that Redback improperly

 4   recognized revenue. Plaintiffs concede that Redback’s auditors, PricewaterhouseCoopers

 5   (“PwC”), reviewed the Company’s financials and “issued clean and unqualified audit opinion

 6   letters in connection with Redback’s financial statements for fiscal years 1999, 2000, 2001 and

 7   2002.” E.g., ¶¶ 34, 258, 286. Plaintiffs also allege that PwC was actively involved in the

 8   Company’s accounting decisions, and that PwC questioned Redback about certain alleged illicit

 9   transactions during its audit and before issuing clean audit opinions. E.g., ¶ 358. As such,

10   plaintiffs’ own allegations defeat plaintiffs’ efforts to plead that Redback improperly recorded

11   revenue.

12          This Court previously held that these same verbatim accounting allegations did not

13   support a claim that “revenue was realized improperly.” Order at 11. Nothing has changed. The

14   Court should dismiss plaintiffs’ accounting fraud claims for failure to plead with specificity facts

15   supporting an assertion that the defendants committed accounting errors as required by the

16   Reform Act. E.g., In re ICN Pharm., Inc. Sec. Litig., 299 F. Supp. 2d 1055, 1067 (C.D. Cal.

17   2004); In re SeeBeyond Techs. Corp. Sec. Litig., 266 F. Supp. 2d 1150, 1160 (C.D. Cal. 2003);

18   Osher v. JNI Corp., 256 F. Supp. 2d 1144, 1153, 1161, 1163 (S.D. Cal. 2003); In re Peerless Sys.

19   Corp. Sec. Litig., 182 F. Supp. 2d 982, 991-92 (S.D. Cal. 2002); Pacific Gateway, 169 F. Supp.

20   2d at 1166; In re Secure Computing Corp. Sec. Litig., 120 F. Supp. 2d 810, 820 (N.D. Cal.

21   2000); Hockey v. Medhekar, 30 F. Supp. 2d 1209, 1216 (N.D. Cal. 1998).

22

23
        5
24         See also In re Network Assoc., Inc., Sec. Litig., No. C 99-01729, 2000 WL 33376577, at
     *13 (N.D. Cal. Sept. 5, 2000) (listing acquired companies’ names, acquisition dates and asserting
25   defendants did not properly disclose acquisitions based on pooling method is insufficient); In re
     Peritus Software Servs., Inc. Sec. Litig., 52 F. Supp. 2d 211, 222 n.3 (D. Mass. 1999) (dismissing
26   notwithstanding restatement; allegation that defendants “‘back-dated several contracts signed in
     January 1998, including a contract with Zale Corporation’ fails to satisfy the requirement that
27   ‘the particular times, dates, places, or other details’” be alleged) (citation omitted).

28
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 1          B.      Implicit Representations of Future Revenue Growth Are Not Actionable

 2          Plaintiffs also contend that even if the transactions with Qwest were not wrongfully

 3   accounted for, they nonetheless “created the illusion of huge demand for . . . Redback’s

 4   products.” ¶ 168. As the Court observed, “the thrust of Plaintiffs’ [Section] 10(b) claims are that

 5   the market was deceived into believing that Redback’s revenues and other successes reflected the

 6   quality of Redback’s products when in fact those successes were ‘bought’ by means of bribes

 7   and quid pro quo arrangements.” Order at 8.

 8          As noted above, plaintiffs do not allege any basis for claiming that Redback’s historical

 9   revenues were inaccurate. See also Order at 11 (noting that revenue was not improperly

10   recognized; “it is clear from the face of the complaint that all of the sales at issue actually took

11   place”). Therefore, plaintiffs must be alleging that they were misled by sales of Redback product

12   into believing that those sales were indicators of future demand for Redback product, when they

13   were purportedly only indicators of bribes and quid pro quo arrangements. Regardless of the

14   purportedly true reason for Redback’s sales of products, i.e. regardless of whether it was because

15   the products were good or because of quid pro quo arrangements, a securities claim cannot be

16   based on the theory that investors were entitled to rely on reports of past sales as an indication of

17   future results. See, e.g., In re Convergent Techs. Sec. Litig., 948 F.2d 507, 513 (9th Cir. 1991)

18   (rejecting claim that historical reports of past growth implied continued future growth); In re

19   Harmonic Inc. Sec. Litig., [2002-2003 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 92,246, at

20   91,481 (N.D. Cal. Nov. 13, 2002) (“[S]tatements of historical facts . . . do not convey an implicit

21   prediction that those events will continue in the future.”) (citations omitted) (emphasis added); In

22   re Caere Corp. Sec. Litig., 837 F. Supp. 1054, 1058 (N.D. Cal. 1993) (statements of past events

23   to not imply that the event will continue in the future).

24          Since plaintiffs do not allege an actionable false statement, their Rule 10b-5 and Section

25   18 claims should be dismissed.

26   III.   PLAINTIFFS’ RULE 10B-5 AND SECTION 18 CLAIMS ARE TIME-BARRED

27          The Court may recall that it dismissed the previous complaint in large part because

28   plaintiffs had not sufficiently alleged loss causation. See Order at 10. The Court was “at a loss to
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 1   understand” how plaintiffs’ injury for purchases made at $100 per share or more “was caused by

 2   the alleged fraud when the stock price already had fallen to $4 per share before the Qwest

 3   revenues dried up and before the [alleged] truth about the Qwest transactions were made public.”

 4   Id.

 5          In order to plead around the loss causation issue, plaintiffs now allege that by no later

 6   than June 2001, the “truth” started to become known about Redback’s “stagnant” revenues

 7   generally and the loss of revenues from Qwest in particular and caused a decline in the price of

 8   the Company’s stock. ¶¶ 452(a), 236. Assuming this to be the case, plaintiffs new allegations

 9   show, as a matter of law, that their Rule 10b-5 and Section 18 claims are time-barred. In

10   particular, even assuming that investors could be misled by historically accurate reports of

11   revenue into believing strong demand for Redback’s products would continue into the future,

12   according to plaintiffs, by June 2001, the market knew that Redback’s fortunes had turned and

13   that its revenues were declining. E.g., ¶¶ 111, 219. Yet the first complaint in this action was not

14   filed until December 2003.

15          A claim under Rule 10b-5 must be brought within “the earlier of (1) 2 years after the

16   discovery of the facts constituting the violation; or (2) 5 years after such violation.” 28 U.S.C. §

17   1658(b). A claim under Section 18(a) must be brought “within one year after the discovery of

18   the facts constituting the cause of action and within three years after such cause of action

19   accrued.” 15 U.S.C. § 78r(c).

20          The statute of limitations “‘begins to run once the investor, in the exercise of reasonable

21   diligence, should have discovered the facts underlying the alleged fraud.’” Berry v. Valence

22   Tech., Inc., 175 F.3d 699, 704 (9th Cir. 1999) (citation omitted). Notably, “an investor need not

23   have full knowledge of [alleged] fraud in order reasonably to be expected to investigate

24   worrisome allegations concerning his investments.” Id. at 705. A reasonable investor is

25   presumed to have information available in the public domain and is imputed with constructive

26   knowledge of this information. See id. at 703 n.4.

27          Here, assuming arguendo that investors were misled into believing that demand from

28   Qwest and others for Redback’s products would continue to be strong on a going forward basis,
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 1   beginning in April 2001, according to plaintiffs themselves, the truth regarding Redback’s future

 2   revenue prospects was revealed. Plaintiffs allege that on April 2, 2001, Redback “began to

 3   announce lower than expected revenues” and “began to condition the market to an absence of

 4   new deals and a loss of revenue from the Company’s biggest customer [Qwest]. . . .” ¶ 219; see

 5   also ¶ 111. On April 2, the Company further announced that it was “writing off $24 million in

 6   excess inventory.” ¶ 219. Thereafter, “analysts began reporting that Qwest was buying less than

 7   expected product from Redback.” ¶ 111. Plaintiffs also allege that on June 27, 2001, Redback

 8   announced lower expected second quarter revenues and yet more write-offs for excess and

 9   obsolete inventory. ¶ 452(a). As plaintiffs allege:

10          Although Redback tried to attribute the bad news to ‘an unprecedented downturn in the
            telecommunications marketplace,’ the truth started to become known regarding
11          Redback’s stagnant sales, lack of hard sales to back up previously announced multi-
            million dollar agreements with Qwest and Williams, excess equipment and declining
12          revenues.

13   Id. (emphasis added); see also ¶ 236 (Alleging on that July 12, 2001, when Redback announced

14   declining revenues, losses, reserves and write-downs, “Redback’s true financial picture began to

15   come into focus.”). These and other announcements that continued from June through the end of

16   September 2001 “demonstrat[ed] that, without the bribe-induced orders from Qwest and others,

17   Redback had minimal sales and its stock price was enormously overvalued.” ¶ 452.

18          In short, although plaintiffs assert that as a result of various Redback announcements

19   regarding deals with Qwest and others, and historical reports of sales, the market was duped into

20   thinking that demand for Redback products was strong (¶¶ 132, 144, 146, 160), they now concede

21   that by June 2001, the market began to know “the truth” – that Redback had “stagnant sales . . .

22   excess equipment and declining revenues,” and a “lack of hard sales to back up previously-

23   announced multi-million dollar agreements with Qwest and Williams . . .” ¶ 452(a). Indeed, the

24   market knew that Redback’s stock price was “enormously overvalued.” ¶ 452. Given these

25   admissions in the Complaint, as a matter of law, plaintiffs were on inquiry notice by June 2001

26   and the statute of limitations began to run. See In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1326-

27   1327 (3d Cir. 2002) (finding inquiry notice based on admissions in complaint); In re Exxon Mobil

28   Corp. Sec. Litig., 387 F. Supp. 2d 407, 419 (D.N.J. 2005) (barring claims as a matter of law where
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 1   “it is readily apparent from the face of the Complaint that Plaintiffs were on inquiry notice”); see

 2   also In re Infonet Services Corp. Sec. Litig., 310 F. Supp. 2d 1106, 1116 n.10, 1117-1118 (C.D.

 3   Cal. 2003) (claims barred as a matter of law where inquiry notice was evidenced by analysts’

 4   reports, many of which were quoted in the complaint).

 5          Plaintiffs will likely respond that although the market knew the truth in June about

 6   Redback’s “stagnant” sales and declining revenues from Qwest in particular, it did not know the

 7   truth about why Qwest revenues were declining. See, e.g. ¶ 219 (“Redback hid the true reasons

 8   behind the anticipated revenue decline.”). Plaintiffs allege that although Redback blamed its

 9   declining revenues on the overall decline in the telecommunications industry, the true reason for

10   the loss of Qwest revenues, at least, was that Qwest and Redback were no longer engaging in

11   illicit quid pro quo deals. ¶¶ 219, 234. The reason that Redback’s revenues were declining is

12   irrelevant for statute of limitations purposes: regardless of why revenues declined, the gist of

13   plaintiffs’ complaint is that the market was misled by Redback’s reports of sales and deals with

14   customers such as Qwest into believing that strong demand for its products would continue into

15   the future; by June 2001, the market knew that this was not true. See Sterlin v. Biomune Sys.,

16   154 F.3d 1191, 1203 (10th Cir. 1998) (investor on inquiry notice when alerted to the possibility

17   of fraud); Infonet, 310 F. Supp. 2d at 1114 (inquiry notice triggered by storm warnings).

18   Plaintiffs plainly had enough at that point to trigger a duty to investigate their claims.

19          As such, plaintiffs’ Rule 10b-5 and Section 18 claims should be dismissed as untimely.

20   IV.    PLAINTIFFS STILL FAIL TO PLEAD LOSS CAUSATION

21          To the extent that plaintiffs contend that the disclosures in the April/June 2001 time

22   period did not reveal defendants’ allegedly fraudulent scheme, plaintiffs have not alleged loss

23   causation. In Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), the Supreme Court

24   held that if the complaint pleads only that the alleged fraud inflated the stock price, it does not

25   sufficiently plead loss causation. See id. at 342-46. The Court held that the complaint must also

26   allege that the company’s “share price fell significantly after the truth became known.” Id. at

27   347 (emphasis added). As the Court recognized, it has long been the law that “a person who

28   ‘misrepresents the financial condition of a corporation in order to sell its stock’ becomes liable to
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 1   a relying purchaser ‘for the loss’ the purchaser sustains ‘when the facts . . . become generally

 2   known’ and ‘ as a result’ share value ‘depreciate[s].’” Id. at 344 (quoting RESTATEMENT

 3   (SECOND) OF TORTS § 548A, cmt. b at 107 (1977)).

 4           Here, plaintiffs allege, on the one hand, that the truth became known in the April/June

 5   2001 time period but, on the other hand, they claim that Redback “hid” the truth about its

 6   financial condition at the same time. E.g., ¶ 219. They cannot have it both ways. To the extent

 7   that the defendants’ alleged fraud was disclosed in the April/June 2001 time period, plaintiffs’

 8   claims are barred by the statute of limitations. If, on the other hand, “the truth” remained hidden,

 9   then plaintiffs’ losses as the result of a decline in Redback’s stock price during that time period

10   cannot be the result of the alleged fraud. Id.; see ¶ 314 (alleging that it was not until a November

11   24, 2003 Denver Post article “exposed Redback’s fraudulent course of business and quid pro quo

12   transactions with Qwest that investors had reason to know why Redback’s stock price had been

13   artificially inflated.”); see also infra n.3 (noting plaintiffs’ prior allegations that the Denver Post

14   article “disclosed for the first time the truth behind Redback’s quid pro quo transactions with

15   Qwest”).

16           In re VeriSign Corporation Securities Litigation, No. C 02-02270 JW, slip op. (N.D. Cal.

17   Apr. 6, 2006), is instructive. There, plaintiffs alleged that a March 19, 2002 SEC filing “revealed

18   for the first time” certain allegedly illicit barter transactions with company affiliates. Id. at 5. In

19   response to this information, the company’s stock closed 10% lower on March 20. Id. However,

20   plaintiffs also alleged that even after this disclosure, the “‘true financial condition of the

21   Company continued to be concealed from investors. . . . [W]hile some of the artificial inflation

22   was taken out of the stock with [the 10-K] disclosures, the true picture of VeriSign’s business

23   had not yet been revealed.’” Id. at 6.

24           Applying Dura, the VeriSign court held that this allegation “affirmatively disclaim[ed]

25   any causal connection between events prior to March 20, 2002 [such as the March 19, 2002 SEC

26   filing] and all parts of the scheme alleged to have been perpetrated by the Defendants.”

27   VeriSign, slip op. at 6 (emphasis added). To the extent there were “losses to the company’s stock

28   as of March 20, 2002, [those losses] must have been caused by a market response to something
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 1   other than Defendants’ alleged . . . scheme.” Id. at 7. As in Verisign, plaintiffs’ claim that the

 2   truth about Redback’s financial condition was not disclosed in the April/June 2001 time period

 3   means that market losses during that period were caused by something other than defendants’

 4   alleged scheme, which, according to plaintiffs, remained hidden until November 2003.

 5          Plaintiffs cannot, however, rely on the November 24, 2003 Denver Post article to plead

 6   loss causation. Under Dura plaintiffs must allege a “significant[]” drop in stock price after the

 7   truth is disclosed. Dura, 544 U.S. at 347. Here, Redback’s stock price on November 24, 2003

 8   increased during the trading day before closing at 32 cents per share, just a penny below its close

 9   on the prior trading day. See Ex. A. Since the disclosure of the alleged fraud did not cause the

10   stock price to drop, the decline in Redback’s stock price over the class period must have

11   occurred for reasons unrelated to the alleged fraud. See VeriSign, slip op. at 7; see also Dura,

12   544 U.S. at 347. Since plaintiffs have failed to allege loss causation, their Rule 10b-5 claim

13   should be dismissed.

14 V.       PLAINTIFFS FAIL TO ALLEGE FACTS SUPPORTING A STRONG
            INFERENCE OF FRAUDULENT INTENT
15
            A.      The Complaint Fails to Allege A Strong Inference of Scienter As to Any
16                  Redback Defendant

17          As noted above, the Reform Act requires that plaintiffs “state with particularity facts

18   giving rise to a strong inference that the defendant acted with the required state of mind” i.e.

19   scienter. 15 U.S.C. § 78u-4(b)(2). To plead scienter for an historical statement, plaintiff “‘must

20   plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless

21   or conscious misconduct.’” In re FVC.com Sec. Litig., 136 F. Supp. 2d 1031, 1036 (N.D. Cal.

22   2000) (quoting Silicon Graphics, 183 F.3d at 974), aff’d, 32 Fed. Appx. 338 (9th Cir. 2002).

23   Plaintiffs must allege “specific ‘contemporaneous statements or conditions’ known to the

24   defendants that demonstrate the intentional or the deliberately reckless false or misleading nature

25   of the statements when made.” In re Read-Rite Corp., 335 F.3d 843, 846 (9th Cir. 2003)

26   (quoting Ronconi, 253 F.3d at 432). In addition, when evaluating whether plaintiff has pleaded

27   the required strong inference, “the court must consider all reasonable inferences . . . including

28   inferences unfavorable to the plaintiffs[,]” and the inference of scienter must be “‘the most
     REDBACK DEFS.’ NOTICE OF MOT. &                   -14-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
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 1   plausible of competing inferences’” from the pleaded facts. Gompper v. VISX, Inc., 298 F.3d

 2   893, 897 (9th Cir. 2002) (citation omitted) (emphasis added).

 3          Finally, “[t]he question is not merely whether [a defendant] had knowledge of . . .

 4   undisclosed facts” such as the fact that Redback had given business to Qwest and expected

 5   Qwest to do likewise. City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1260 (10th Cir.

 6   2001) (cited with approval in Gompper, 298 F.3d at 896). “[R]ather, it is the danger of

 7   misleading buyers that must be actually known or so obvious [to the defendant] that any

 8   reasonable man would be legally bound as knowing.” Id.

 9          Here, as noted, plaintiffs claim that the purportedly illicit quid pro quo transactions with

10   Qwest allegedly deceived the market in two ways. First, plaintiffs claim that Redback

11   wrongfully recognized revenue in connection with those transactions. Second, plaintiffs claim

12   that “the market was deceived into believing that Redback’s revenues and other successes

13   reflected the quality of Redback’s products when in fact those successes were ‘bought’ by means

14   of bribes and quid pro quo arrangements.” Order at 8. Accordingly, plaintiffs must allege

15   particularized facts as to each defendant that strongly suggest that each defendant knew or was

16   deliberately reckless in not knowing either (1) that Redback’s financial statements were

17   materially in error because Redback had wrongfully recognized revenue in transactions with

18   customers; or (2) that announcements of sales and deals with Qwest and other customers would

19   mislead investors unless they were announced concurrently with allegedly related transactions.

20   The Complaint does not meet this burden as to any of the twelve individuals named as

21   defendants.

22          B.      No Facts Are Alleged to Show that Any Redback Defendant Knew Redback’s
                    Accounting Was Improper
23

24          As set forth above, plaintiffs fail to allege the predicate for a claim of revenue recognition

25   fraud, i.e. any specifics that could suggest that Redback in fact improperly accounted for the

26   challenged transactions. See supra Section II.A. Nor does the Complaint “allege specific

27   contemporaneous conditions known to the [any of the] defendants that would strongly suggest

28   that the defendants understood” the company’s financial accounting was improper. Vantive, 283
     REDBACK DEFS.’ NOTICE OF MOT. &                  -15-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
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 1   F.3d at 1090-91. For example, plaintiffs do not allege anyone from PwC (Redback’s auditors),

 2   or from the Company’s finance or accounting department, ever believed there were problems

 3   with the manner in which Redback was accounting for the challenged transactions, let alone

 4   specific instances in which they brought such problems to the attention of any of the individual

 5   defendants and were ignored. Nor do plaintiffs describe, summarize or identify any document

 6   that came to any individual defendant’s attention suggesting problems in Redback’s accounting.

 7   To the contrary, inasmuch as Redback never restated any of the transactions that plaintiffs claim

 8   were fraudulent, it is only plaintiffs say so that there were even problems in the first place.

 9          Indeed, where plaintiffs allege that any of the individual defendants purportedly allowed

10   Redback to improperly recognize revenue, the allegations are wholly conclusory. Thus,

11   plaintiffs allege that defendants Messrs. Gentner (a former Redback CFO), Ragavan (a former

12   CEO), Kruep (a former VP of Sales) “and other Individual Defendants” caused Redback to

13   overstate its revenues from a sale to Qwest “by failing to reduce the net revenues generated”

14   from the product by “the value of the stock incentive that had been provided to Qwest’s affiliates

15   under the Siara Warrant Agreement.” ¶ 102. These allegations simply assume that a reduction

16   in net revenues was required. Plaintiffs never explain their reason for believing their knowledge

17   of accounting is somehow superior to Redback’s auditors, who are not alleged to have required

18   such a reduction. Nor do they plead any particularized facts known to any of these individuals,

19   Messrs. Gentner, Ragavan or Kruep, that could “strongly suggest” that they understood that the

20   company’s accounting for this transaction was improper. Vantive, 283 F.3d at 1090-91.

21          Instead, the closest plaintiffs come to alleging any knowledge about the accounting for an

22   alleged illicit transaction is their allegations regarding Mr. Lamond (a former outside director of

23   Redback). Plaintiffs contend that Mr. Lamond “frequently interacted with PwC” (¶ 358), and

24   that he “discussed with PwC the true facts surrounding Qwest’s IRU sale to Redback and was

25   [questioned by PwC] regarding whether the $7 million IRU purchase should be charged against

26   revenues recognized on the sale.” Id. Plaintiffs conclude that Mr. Lamond “clearly understood

27   the undisclosed fraudulent nature of Redback’s reported sales to Qwest and knowingly or with

28
     REDBACK DEFS.’ NOTICE OF MOT. &                   -16-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
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 1   deliberate recklessness caused Redback to issue materially false and misleading statements

 2   regarding such sales and the material revenues improperly recognized therefrom.” Id.

 3          Given that this transaction is also not alleged to have been restated, the most reasonable

 4   inference to be drawn from these allegations is that Mr. Lamond told PwC the truth regarding the

 5   IRU transaction, and that PwC was comfortable with the accounting treatment for the

 6   transaction. Plaintiffs readily concede that PwC audited Redback’s annual financial statements,

 7   “issued clean and unqualified audit opinion letters in connection with [those] financial

 8   statements,” and “reviewed Redback’s quarterly financial statements.” ¶¶ 34, 258, 286. It is

 9   well established that consultation with outside auditors, coupled with an unqualified audit

10   opinion certifying the financial statements as presented in conformity with GAAP, negates an

11   inference of scienter unless plaintiffs plead particularized facts demonstrating that defendants

12   withheld relevant information from the auditors or knew that the audit was unreliable. See In re

13   Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1421 (9th Cir. 1994); In re Cirrus Logic Sec. Litig.,

14   946 F. Supp. 1446, 1465 (N.D. Cal. 1996); Newton v. Uniwest Fin. Corp., 802 F. Supp. 361,

15   367-68 (D. Nev. 1990), aff’d, 967 F.2d 340 (9th Cir. 1992). No such facts are alleged here.

16          *                              *                               *

17          In short, there is no basis for plaintiffs to claim they have pleaded a strong inference that

18   any of the individual defendants knew or was deliberately reckless in not knowing Redback’s

19   accounting was in error. Thus, all that is left is the question of whether plaintiffs have pleaded a

20   strong inference that at the time any of the defendants spoke to the market about sales to Qwest,

21   that defendant knew or was deliberately reckless in not knowing investors would be deceived

22   about those sales unless he discussed other transactions with that company or its affiliates.

23          C.      No Facts Are Alleged to Show the Individual Defendants Knew Redback’s
                    Disclosures Were Misleading
24

25                  1.      Messrs. Gentner, Lamond, Haque, Kurtz and Cronan

26          At the outset, essentially the only particularized allegations made with respect to Messrs.

27   Gentner or Lamond are those discussed above. Nothing is alleged to suggest that either of them

28   knew or had any reason to believe that Redback’s customers were only buying Redback product
     REDBACK DEFS.’ NOTICE OF MOT. &                  -17-                     C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
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 1   because of a bribe or quid pro quo arrangement. Indeed, even assuming either Mr. Gentner or

 2   Mr. Lamond were aware of alleged quid pro quo transactions, since “there is nothing inherently

 3   wrong with reciprocal transactions,” where the revenue for the transactions is not ultimately

 4   restated to support an inference that it was improperly accounted for in the first instance,

 5   “plaintiff’s task of pleading scienter becomes more difficult” and cannot be satisfied in the

 6   absence of specific allegations showing that defendants “knew, or should have known, that the

 7   specific transaction was improper.” In re Flag Telecom Holdings, Ltd. Sec. Litig., 308 F. Supp.

 8   2d 249, 260-63 (S.D.N.Y. 2004) (Dismissing allegations against telecom company with stock

 9   price decline during dotcom bust where plaintiffs alleged “improper reciprocal transactions” with

10   other telecom companies intended “to give the appearance that the company was succeeding” but

11   failed to allege facts supporting scienter). No such allegations can be found in the FAC.

12          With respect to each of Messrs. Haque (a former outside director), Kurtz (an outside

13   director) and Cronan (a former general counsel and current CFO), plaintiffs allege even less. All

14   the Complaint says about any of them is the conclusory allegation that they must have known of

15   an alleged fraud on account of their positions within the Company. With respect to Messrs.

16   Haque and Kurtz, the Complaint alleges they were members of the Audit Committee. ¶¶ 23,

17   373, 398. With respect to Mr. Cronan, all plaintiffs allege is that he “was in a unique position to

18   know the true nature of Redback’s undisclosed quid pro quo contracts with Qwest and other

19   telecommunications companies” because he was the General Counsel and later the CFO. ¶ 413.

20          This Court rejected similar conclusory allegations of scienter the first time around, noting

21   that “[f]or the most part, Plaintiffs simply allege that certain defendants must have known what

22   was going on because of the positions they held within the company. Such allegations are

23   insufficient to meet the heightened pleading standard applicable here.” January 21, 2005 Order

24   Dismissing Consolidated Complaint, at 10; see also Read-Rite, 335 F.3d at 848-49 (affirming

25   district court’s conclusion that a defendant’s high-ranking position in management does not, by

26   itself, give rise to a strong inference of scienter). The claims against Messrs. Gentner, Lamond,

27   Haque, Kurtz, and Cronan should be dismissed.

28
     REDBACK DEFS.’ NOTICE OF MOT. &                  -18-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
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 1                  2.       Mr. Garg

 2          With respect to Mr. Garg (another outside director), plaintiffs allege that a Redback sales

 3   and marketing manager “received pressure” from him and Messrs. Barsema and Kruep “to get

 4   orders” and that “they” emphasized to the sales manager that “Redback had provided stock and

 5   customer referrals to Qwest and that Qwest had promised orders for Redback’s equipment in

 6   return.” ¶ 61. In the first place, this allegation contains nothing of the who, what, when, where

 7   and how required by the Reform Act. E.g., Vantive, 283 F.3d at 1087-1089, 1091. Who among

 8   Messrs. Garg, Barsema and Kruep actually talked to this sales manager? Was there one

 9   conversation or multiple discussions? Where and when did any of these conversations take

10   place? What did any of themsay? What did the sales manager say in response? What orders did

11   Qwest promise? Who at Qwest had made such a promise? The lack of details gives no credible

12   basis for believing that any such conversation ever occurred. See id.

13          Even if this vague allegation met the particularity requirements of the Reform Act, one

14   would expect sales people to be pressured to sell product and to be given arguments to use to

15   customers as to why they should purchase product. The allegation does nothing to show that

16   Qwest or any other Redback customer was only buying Redback product because of a bribe or

17   quid pro quo arrangement, let alone explain why it was deliberately reckless of Mr. Garg (or, for

18   that matter, Barsema or Kruep) not to insist upon disclosures of allegedly related transactions

19   when Redback discussed sales to Qwest. To the contrary, the allegation does not even suggest

20   that Qwest was buying Redback product. Since no other particularized allegations are offered

21   with respect to Mr. Garg, it is evident that plaintiffs have failed to plead a strong inference of

22   scienter against him.

23                  3.       Mr. Ragavan

24          Plaintiffs allege that they have pleaded a strong inference of scienter with respect to Mr.

25   Ragavan’s because he “signed the Siara Warrant Agreement, which obligated Qwest to purchase

26   $40 million of Redback’s products in a two-year period.” ¶ 20. The main thrust of this

27   allegation seems to be that Ragavan knew Qwest was essentially bribed to purchase $40 million

28
     REDBACK DEFS.’ NOTICE OF MOT. &                   -19-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
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 1   of Redback product. Yet the warrant in no way obligates Qwest to purchase Redback product,

 2   regardless of quality. Instead, the warrant states, in relevant part:

 3          Qwest . . . hereby agrees to purchase . . . from the Company . . . upon reasonable
            and customary terms at least $40 million worth of equipment, that is currently
 4          under development by the Company, on or prior to December 31, 2001; provided
            that the Company shall have made available to Qwest equipment that meets in all
 5          material respect the specifications and product pricing and service level
            agreements (commensurate with pricing and service levels offered to third parties
 6          for similar quantities) . . . . If Qwest does not purchase at least $40 million worth
            of such equipment from the Company on or prior to December 31, 2001, then the
 7          Company may pursue all remedies available to it . . . arising in connection with
            Qwest’s breach of Qwest’s agreement in the immediately preceding sentence.
 8

 9   Ex. B (emphasis added). 6 Since Qwest would not be in breach of this agreement unless the

10   Redback product offered to it met “in all material respects” a host of Qwest requirements, an

11   equally if not more plausible inference to be drawn from Mr. Ragavan’s knowledge of the

12   warrant is that he did not view it as something that obligated Qwest to purchase Redback product

13   regardless of whether Redback could deliver quality product that met Qwest specifications. See

14   Gompper, 298 F.3d at 897. Quite simply, if Redback did not produce products that met Qwest’s

15   quality, pricing and service standards, Qwest had no obligation to buy product. As such,

16   knowledge of the warrant fails to support a strong inference that Mr. Ragavan knowingly or with

17   deliberate recklessness deceived investors about sales of product to Qwest. 7

18          Plaintiffs remaining allegations with respect to Mr. Ragavan are to the effect that he was

19   purportedly aware of related transactions with Qwest. See ¶¶ 84, 89, and 107. For example,

20   plaintiffs allege that Mr. Ragavan, along with Messrs. Kruep, Khosla “and others,” agreed to

21   purchase services from a Qwest affiliate “solely to obtain Qwest’s agreement to purchase the

22   SMSTM 10000, so that Redback could meet Wall Street’s expectations.” See ¶ 84. In the first

23   instance, no details are alleged about the agreement itself to support plaintiffs claim that Mr.

24
        6
         The Court previously took judicial notice of the Siara Warrant. See January 21, 2005 Order
25   Dismissing Consolidated Complaint, at 4.
26      7
          Plaintiffs also rely on knowledge of the warrant to infer scienter on the part of Messrs.
     Khosla, Kruep and Lamond. ¶¶ 74, 358, 365. Just as this allegation is inadequate with respect to
27   Mr. Ragavan, it is inadequate as to them as well.
28
     REDBACK DEFS.’ NOTICE OF MOT. &                   -20-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
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 1   Ragavan (or Kruep or Khosla) knew that services were purchased from the Qwest affiliate in

 2   order to secure Qwest’s agreement to purchase Redback product. When was this agreement

 3   made? Was it in writing? Was it documented in an email? Who at Qwest was a party to the

 4   agreement? What were the specific terms? What was Mr. Ragavan’s role? In the absence of

 5   such specifics, plaintiffs cannot plead a strong inference of scienter. Read-Rite, 335 F.3d at 846.

 6          In any event, this allegation does not show Mr. Ragavan (or Messrs. Kruep or Khosla)

 7   knew or had reason to believe that a sale to Qwest was not a real sale or that Redback only got

 8   the sale because of a quid pro quo to Qwest. According to one of plaintiffs’ confidential

 9   witnesses, the alleged agreement to purchase services from a Qwest affiliate was “an

10   inducement” to Qwest to purchase services from Redback. ¶ 83. This does not show that Qwest

11   purchases from Redback were contingent upon Redback purchases from the Qwest affiliate, let

12   alone that Mr. Ragavan knew or believed this to be the case. Indeed, assuming that transactions

13   with Qwest were accounted for correctly (and plaintiffs’ allegations show nothing to the

14   contrary), the FAC fails to explain why there would be anything wrong with making Qwest

15   purchases from Redback contingent upon reciprocal purchases from Qwest. Fundamentally, the

16   FAC does not allege facts that “strongly suggest” that when Mr. Ragavan spoke to the market

17   about sales to Qwest, he knew or was deliberately reckless in not knowing investors would be

18   deceived about those sales unless he discussed other transactions with that company or its

19   affiliates. Vantive, 283 F.3d at 1090-91. 8

20
        8
21        Plaintiffs attempt to supplement their theory that individual defendants, including Mr.
     Ragavan, purportedly knew or were reckless in not knowing that Qwest was purchasing product
22   only because of quid pro quo arrangements or bribes by alleging that Redback had product
     problems that “all of the Individual Defendants” learned of from attending “weekly executive
23   meetings.” ¶¶ 81, 87. Plaintiffs do not allege when these purported meetings occurred, who
     attended the meetings or what was said at the meetings. For example, did any product engineer
24   declare at these meetings that alleged technical problems were insurmountable? Plaintiffs never
     say. What is more, the Class Period here covers more than three-and-a-half years, during which
25   time Redback had four different CEOs, three different CFOs and many different executives and
     directors. See ¶¶ 15-26. Mr. Patel, the person who allegedly reported on these issues, did not
26   work at the Company throughout the entire Class Period, nor did either of the unnamed sources
     alleged to have attended these meetings. See ¶¶ 37, 60, 79. Moreover, despite the purported
27   product problems, there is no dispute that Redback sold hundreds of millions of dollars of
     product to major telecommunications carriers. The alleged product problems add nothing.
28
     REDBACK DEFS.’ NOTICE OF MOT. &                 -21-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
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 1                  4.      Mr. Kruep

 2          With respect to Mr. Kruep (a Redback V.P. of Sales), plaintiffs also allege that one of

 3   their confidential witnesses stated that “Kruep provided information on sales and revenues for

 4   press releases and SEC filings, even though Kruep knew that these revenues were not honestly

 5   earned, but were the result of barter and bribery.” ¶ 89. The only revenues that the Complaint

 6   discusses in connection with Mr. Kruep are those related to Qwest. E.g., ¶¶ 61, 74, 84, 89, 102.

 7   Even as to those revenues there are, as shown above, no particularized allegations of facts from

 8   which it could be strongly inferred that Mr. Kruep knew or was deliberately reckless in not

 9   knowing that there was something about allegedly related transactions between Qwest and

10   Redback that required disclosure. Nor does the Complaint allege any facts to show that the

11   information Mr. Kruep purportedly gave on sales and revenues was in any way inaccurate.

12   Indeed, as shown infra, there is no basis for holding Mr. Kruep liable as a primary violator of

13   Rule 10b-5 in any event.

14                  5.      Mr. Khosla

15          With respect to Mr. Khosla (an outside director), plaintiffs generally assume that he was

16   aware of transactions with Qwest due to his membership on various boards of directors. See,

17   e.g., ¶¶ 18, 67, 365. To the extent plaintiffs allege that he was aware of purportedly related

18   transactions with Qwest or the Siara warrant, as shown above, it still alleges nothing to suggest,

19   let alone strongly suggest, Mr. Khosla knew or had any reason to believe that such transactions

20   were wrongful, let alone that he knew or was deliberately reckless in not knowing that to the

21   extent he made statements about Redback’s sales of product, investors would be deceived unless

22   he discussed other transactions with that company or its affiliates. See January 21, 2005 Order

23   Dismissing Consolidated Complaint, at 10-11.

24                  6.      Mr. DeNuccio

25          Plaintiffs also name Mr. DeNuccio, Redback’s current CEO and president, as a defendant

26   even though he did not start at Redback until August 2001 – well after the alleged related

27   transactions allegedly occurred and after Redback’s stock had lost almost all of its value. ¶¶ 15,

28   417. In an attempt to sweep in Mr. DeNuccio, plaintiffs claim that a sales employee “brought
     REDBACK DEFS.’ NOTICE OF MOT. &                 -22-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
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 1   Mr. DeNuccio up to speed regarding the past-year’s dealings with Qwest” when Mr. DeNuccio

 2   joined Redback. ¶ 380. The Complaint does not provide any details that could corroborate that

 3   this conversation ever occurred, such as where and when Mr. DeNuccio and the unnamed sales

 4   employee spoke, who else, if anyone, was present, the circumstances that led to the alleged

 5   conversation or what Mr. DeNuccio purportedly said in response. Plaintiffs do not even allege

 6   that the sales person told Mr. DeNuccio that Qwest only bought Redback’s products because of

 7   alleged bribes or quid pro quo arrangements, much less purport to describe the substance of what

 8   the sales person allegedly said that would possibly have conveyed to Mr. DeNuccio that any quid

 9   pro quo transactions with Qwest were wrongful.

10          Plaintiffs also allege that Mr. DeNuccio stated in an August 29, 2001 conference call that

11   “new products were finished and in trials with 10 customers.” ¶ 242. Plaintiffs say that one of

12   their confidential witnesses “would have been aware if there had been 10 customers of Redback

13   that had the new product in trials in August 2001.” Id. at 243. Yet plaintiffs do not allege any

14   factual basis for inferring that Mr. DeNuccio knew, or was reckless in not knowing, that the

15   statement he allegedly made in this conference call was false. Indeed, apart from the fact that the

16   sales person was not alleged to have said definitively that there were not 10 customers that had

17   the new product, at the point the statement was allegedly made, in August 2001, Mr. DeNuccio

18   had been at Redback for less than a month. ¶ 15. Perhaps Mr. DeNuccio was misinformed.

19   Perhaps the confidential witness was misinformed. This hardly makes a deliberate lie out of

20   anything Mr. DeNuccio said. More fundamentally, the statement attributed to Mr. DeNuccio

21   has nothing to do with the allegedly misleading statements about sales to Qwest that are the crux

22   of plaintiffs’ complaint. Plaintiffs do not even allege a basis for inferring that Mr. DeNuccio’s

23   statement was material.

24                  7.     Mr. Barsema

25          The deficiencies of most of the allegations against Mr. Barsema (former President, CEO

26   and director), have already been addressed above, i.e. that Barsema knew of the Siara warrant,

27   that he or Mr. Garg or Mr. Kruep pressured a Redback sales person to make sales, and that he or

28   Mr. Garg or Mr. Kruep said to this sales person that Redback “had provided stock and customer
     REDBACK DEFS.’ NOTICE OF MOT. &                 -23-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
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 1   referrals to Qwest and that Qwest had promised orders for Redback’s equipment in return.” FAC

 2   ¶¶ 61, 388. The remaining substantive allegation against him is that in May 1999 (around the

 3   time Redback became a public company) Mr. Barsema, for no reason that the Complaint bothers

 4   to describe, told the aforementioned sales person that Barsema was holding “some paperwork

 5   from U.S. Telesource,” and that U.S. Telesource was “apparently” the named recipient of stock

 6   Redback had agreed to provide to Qwest executives. Id. ¶ 63. Yet the FAC nowhere alleges

 7   facts from which it could be inferred that Mr. Barsema either knew or was deliberately reckless

 8   in not knowing that there was something inherently wrongful about providing stock to U.S.

 9   Telesource or in failing to mention that transaction if Mr. Barsema ever made statements about

10   sales in general or sales to Qwest in particular.

11                  8.      Mr. Wolf

12          Finally, plaintiffs appear to fault Mr. Wolf (another former Redback CFO) for referring

13   to Qwest as “crooks” and “extortionists.” ¶ 89. Even if Mr. Wolf referred to Qwest as crooks,

14   there are no facts to suggest Mr. Wolf believed that Redback was a crook or that he should have

15   referred to Qwest as such any time he spoke to investors.

16          *                               *                               *

17          In sum, the Complaint does not allege a strong inference of scienter against any

18   defendant. It does not state particularized facts creating a strong inference that any of the

19   individual defendants knew or had any reason to believe that transactions with Qwest as to which

20   plaintiffs cannot show any incorrect accounting were nonetheless somehow inherently wrongful.

21   Nor does the Complaint show that to the extent any defendant spoke to the market about sales to

22   Qwest, he knew or was deliberately reckless in not knowing investors would be deceived about

23   those sales unless that individual discussed other transactions with that company or its affiliates.

24   Plaintiffs simply assume that the alleged related transactions with Qwest and others were

25   improper and that nondisclosure of the transactions was self-evidently deceptive. Plaintiffs do

26   not plead a factual basis for either of these assumptions.

27

28
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 1          D.      Plaintiffs’ Stock Sale Allegations Fail to Save the Complaints’ Otherwise
                    Deficient Scienter Allegations
 2

 3          Plaintiffs continue to allege that stock sales by certain of the individual defendants during

 4   the Class Period support a strong inference of scienter. The Court previously ruled that these

 5   allegations were insufficient. See January 21, 2005 Order Dismissing Consolidated Complaint,

 6   at 11. The current complaint does not add new factual allegations to suggest that the stock sales

 7   were suspicious or unusual. Accordingly, dismissal is again appropriate.

 8          Plaintiffs allege that only eight of the twelve individual defendants sold stock during the

 9   lengthy Class Period: Messrs. Barsema, DeNuccio, Garg, Gentner, Kruep, Kurtz, Lamond and

10   Ragavan. Key executives, such as Messrs. Wolf and Cronan, each of whom served as CFO of

11   Redback, are not alleged to have sold stock. As the Court previously observed, “[t]he fact that

12   these key officers did not sell any stock during the class period significantly undermines any

13   inference of scienter that might arise from the sales of other officers.” Id.; accord Lipton v.

14   PathoGenesis Corp., 284 F.3d 1027, 1037 (9th Cir. 2002); Ronconi, 253 F.3d at 436. That is

15   because courts in this Circuit “do not presume that corporate officers make false statements

16   simply out of spite or to impress others.” In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp.

17   2d 1248, 1269 (N.D. Cal. 2000); see also Schuster v. Symmetricom, Inc., [2000-2001 Transfer

18   Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,206, at 95,033 (N.D. Cal. Aug. 1, 2000) (“[C]ourts do not

19   presume that corporate officers make false statements simply out of spite or to impress others. ...

20   Thus, a plaintiff who makes no meaningful allegations of motive faces ‘a tougher standard’ for

21   establishing scienter.”) (internal citation omitted), aff’d, 35 Fed. Appx. 705 (9th Cir. 2002).

22   Plaintiffs offer no factual basis from which to infer that Mr. Wolf and Mr. Cronan would have

23   risked committing securities fraud to benefit others at the Company.

24          In any event, stock sales by insider defendants can support an inference of scienter only if

25   they are “‘dramatically out of line with prior trading practices at times calculated to maximize

26   the personal benefit from undisclosed inside information.’” Silicon Graphics, 183 F.3d at 986

27   (citation omitted). Among the factors courts consider in determining whether the stock sales are

28   unusual or suspicious are the amount and percentage of shares sold, the timing of the sales, and
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 1   whether the sales were consistent with the insider’s prior trading history. See id. The present

 2   Complaint, like the prior complaints, does not allege facts to suggest the sales were unusual or

 3   suspicious. Plaintiffs allege nothing about ten of the defendants’ trading patterns before or after

 4   the Class Period. For the remaining two defendants, Messrs. Barsema and Kruep, plaintiffs

 5   allege that each sold a certain amount of stock in 1999. See ¶¶ 133, 407. These facts suggest

 6   only that their later sales during the Class Period were consistent with their prior trading history.

 7          In the few places where the circumstances surrounding the stock sales can be discerned

 8   from the allegations in the Complaint, those circumstances further undermine an inference of

 9   scienter. Plaintiffs allege that Messrs. Gentner, Ragavan and Barsema all sold shares when they

10   departed from Redback. See ¶¶ 188, 382, 390, 402. As this Court has held, an insider’s sale of

11   stock in connection with his or her departure from the company does not support a strong

12   inference of scienter. See In re Read-Rite Corp. Sec. Litig., 115 F. Supp. 2d 1181, 1184 (N.D.

13   Cal. 2000), aff’d, 335 F.3d 843 (9th Cir. 2003); accord Greebel, 194 F.3d at 206. Accordingly,

14   their stock sales do not support a strong inference of scienter.

15          Plaintiffs continue to assert that stock distributions by venture fund affiliates support an

16   inference of scienter. Courts hold that distributions of stock within venture capital funds are not

17   deemed to be “stock sales” and do not support an inference of scienter. See In re Versant Object

18   Tech. Corp. Sec. Litig., No. C 98-00299, 2000 WL 33960105, at *14 (N.D. Cal. May 18, 2000)

19   (rejecting inference of scienter where defendant, a partner of a venture capital firm, received

20   shares of company in a distribution made by the firm); Wenger v. Lumisys, Inc., 2 F. Supp. 2d

21   1231, 1251 (N.D. Cal. 1998) (distribution to limited partners investors was not a sale of shares

22   and did not support an inference of scienter); see also In re E.Spire Commc’ns, Inc. Sec. Litig.,

23   127 F. Supp. 2d 734, 743 (D. Md. 2001) (distributions were “not ‘sales’ within the meaning of

24   the Exchange Act” and “do not constitute proof of scienter”). The Court should again reject any

25   inference of scienter based upon these alleged venture fund distributions.

26          Plaintiffs’ stock sale allegations are insufficient to save their otherwise defunct scienter

27   allegations. The Complaint should be dismissed for failure to plead particularized facts raising a

28   strong inference of scienter as to any of the defendants.
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 1   VI.       DEFENDANTS ARE NOT LIABLE FOR STATEMENTS MADE BY OTHERS

 2             A.     The “Group Pleading” Presumption is Not Available Here

 3             Plaintiffs continue to attempt to invoke the pre-Reform Act “group pleading”

 4   presumption and hold all of the defendants liable for the allegedly false and misleading

 5   statements. See ¶¶ 28-32. They do so despite the fact that the defendants occupied vastly

 6   different positions within the Company and that most are alleged to have been employed by or

 7   associated with Redback during only portions of the Class Period. See ¶¶ 15-26. 9

 8             Plaintiffs’ reliance on “group pleading” is inappropriate and unsupported. First, the

 9   presumption did not survive the Reform Act. See Southland Sec. Corp. v. INSpire Ins. Solutions,

10   Inc., 365 F.3d 353, 365 (5th Cir. 2004). Second, even if it did survive, the group pleading

11   presumption could be invoked only against “‘a narrowly defined group of corporate officers or

12   directors who are alleged to have had day-to-day control’” over the company and who, based

13   upon corporate function, were presumably involved in drafting the allegedly misleading

14   statement. In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 593 (9th Cir. 1995) (citation omitted).

15             Here, plaintiffs fail to plead particularized facts regarding each defendant’s participation

16   in making or reviewing each statement, and instead assert generally that all of the defendants

17   “were involved in drafting, producing, reviewing, approving and/or disseminating the materially

18   false and misleading statements and information.” ¶ 30. Such boilerplate allegations are

19   insufficient to invoke the group pleading doctrine. Valence Tech., 175 F.3d at 706-07; In re

20   Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833, 845 (N.D. Cal. 2000). Plaintiffs nowhere explain

21   how the members of the purported “group,” who occupied vastly different positions within the

22   company, actually participated in making or reviewing each statement. For example, Messrs.

23   Garg, Lamond, Khosla, Kurtz and Haque were or are outside directors, who are routinely

24
           9
25        Plaintiffs have conceded that the defendants cannot be held liable for statements made or
     events that occurred when they were not employed by or associated with the Company. See
26   Plaintiffs’ Omnibus Brief in Opposition to Defendants’ Motions to Dismiss the Consolidated
     Complaint, filed Dec. 13, 2004, at 28. Accordingly, none of the defendants can be liable for
27   statements made or events that occurred while they were not at Redback.

28
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 1   excluded from the group pleading presumption in the absence of specific allegations indicating

 2   that they had day-to-day involvement of in corporate activities. See GlenFed, 60 F.3d at 593; In

 3   re Oak Tech. Sec. Litig., No. 96-20552, 1997 WL 448168, at *10 (N.D. Cal. Aug. 1, 1997).

 4           B.     Plaintiffs Fail to Plead A “Primary Violation” With Respect to Mr. Kruep

 5           Plaintiffs also continue to assert a 10b-5(b) claim against Mr. Kruep, notwithstanding the

 6   fact that he is not alleged to have made any false or misleading statement.

 7           In Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., the United

 8   States Supreme Court held that liability under Section 10(b) extends only to “primary violators”

 9   and there is no liability for merely “aiding and abetting” a violation. 511 U.S. 164, 191 (1994).

10   The Fourth Amended Complaint does not allege that Mr. Kruep “made” any of the alleged

11   misstatements (see Central Bank, 511 U.S. at 171-72), that Mr. Kruep signed any of the alleged

12   misstatements (see Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 (9th Cir. 2000)) or that Mr.

13   Kruep participated in any respect, let alone “substantially,” in the drafting or editing of any of

14   the alleged misstatements. See In re Software Toolworks Inc. Sec. Litig., 50 F.3d 615, 628 n.3

15   (9th Cir. 1994); see also In re Harmonic, Inc. Sec. Litig., 163 F. Supp. 2d 1079, 1099 (N.D. Cal.

16   2001). Accordingly, Mr. Kruep cannot be liable under Rule 10b-5(b), 17 C.F.R. § 240.10b-5(b),

17   which prohibits making false statements.

18           Although it is clear that plaintiffs are attempting to assert a misrepresentation claim

19   against Mr. Kruep, plaintiffs have also included a cause of action for “scheme” liability under

20   Rules 10b-5(a) & (c), 17 C.F.R. § 240.10b-5(a) & (c). 10 The Ninth Circuit recently held:

21           [T]o be liable as a primary violator of § 10(b) for participation in a ‘scheme to
             defraud,’ the defendant must have engaged in conduct that had the principal
22           purpose and effect of creating a false appearance of fact in furtherance of the
             scheme. It is not enough that a transaction in which a defendant was involved
23           had a deceptive purpose and effect; the defendant’s own conduct contributing
             to the transaction or overall scheme must have had a deceptive purpose and
24           effect.

25
        10
            All of the causes of action under Section 10(b), including the cause of action under Section
26   10(b) and Rules 10b-5(a) & (c) for scheme liability, fail for the reasons stated herein. The cause
     of action for scheme liability, however, has additional relevance to Mr. Kruep who did not make
27   any statements and therefore cannot, as a matter of law, be liable under Rule 10b-5(b).

28
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 1   Simpson v. AOL Time Warner, Inc., -- F.3d --, 2006 WL 1791042, at *7 (9th Cir. June

 2   30, 2006).

 3          Here, the Complaint simply does not plead facts to suggest that Mr. Kruep’s conduct had

 4   a deceptive purpose and effect. Even taking all the allegations in the Complaint as true, it is

 5   clear that the alleged related transactions created real revenue and were beneficial for Redback.

 6   Order at 11. Accordingly, the claims against Mr. Kruep should be dismissed.

 7   VII.   NO CONTROLLING PERSON LIABILITY UNDER 20(a)

 8          Plaintiffs also seek to hold the individual defendants liable as “controlling persons” of

 9   Redback. See ¶ 531. The Court previously found that there was “no basis for asserting

10   controlling person liability under [Section] 20(a)” because plaintiffs “failed to allege a viable

11   claim of securities fraud.” Order at 13. Nothing has changed. Plaintiffs’ Section 20(a) claim

12   should be dismissed.

13   VIII. PLAINTIFFS FAIL TO STATE A CLAIM UNDER SECTION 18(a)

14          Plaintiffs continue to assert a Section 18(a) claim against all individual defendants except

15   Mr. Kruep. ¶ 516. Section 18(a) “provides an express right of action for a false or misleading

16   statement contained in a document [filed] with the SEC . . . in favor of any person who, ‘in

17   reliance upon such statement, shall have purchased or sold a security at a price which was

18   affected by such statement. . . .’” In re Genentech, Inc. Sec. Litig., No. C-88-4038, 1989 WL

19   106834, at *4 (N.D. Cal. July 7, 1989) (quoting 15 U.S.C. § 78(r)).

20          Plaintiffs have failed to plead that any statement caused economic loss. To survive

21   dismissal, a Section 18(a) plaintiff must plead with particularity that the alleged false or

22   misleading statement caused his or her economic loss. In re Stone & Webster, Inc., Sec. Litig.,

23   253 F. Supp. 2d 102, 135 (D. Mass. 2003); see also Argent Classic Convertible Arbitrage Fund

24   L.P. v. Rite Aid Corp., 315 F. Supp. 2d 666, 685 (E.D. Pa. 2004). Here, the Court previously

25   dismissed plaintiffs’ Section 18(a) claim because plaintiffs had not “explained adequately how

26   class members were injured by the alleged statements based upon the allegations set forth in the

27   [TAC].” Order at 13. As discussed above, plaintiffs still have not “explained adequately” how

28   the alleged fraud caused their economic loss, (see supra Section IV), nor have they pleaded
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 1   particularized facts supporting their allegations that the challenged statements were false and

 2   misleading. See supra Section II.

 3           Plaintiffs have also failed to plead actual (or “eyeball”) reliance. Howard, 228 F.3d at

 4   1063. A plaintiff purchaser must allege that he or she “actually read a copy of the document

 5   filed with the SEC . . . and was induced to act upon specific misrepresentations in the

 6   document.” In re Suprema Specialties, Inc. Sec. Litig., 334 F. Supp. 2d 637, 654 (D.N.J. 2004),

 7   aff’d in relevant part, reversed on other grounds, 438 F.3d 256 (3d Cir. 2006). In the absence of

 8   “any facts demonstrating that the named plaintiffs actually relied upon the allegedly misleading

 9   statements filed with the SEC,” a Section 18(a) claim must be dismissed. Genentech, 1989 WL

10   106834, at *5. 11

11           Rather than pleading actual reliance, the Complaint pleads only, in conclusory fashion,

12   that “Plaintiff and other Class Members read and reasonably relied upon the statements.” ¶ 523.

13   Plaintiffs do not allege “any facts demonstrating that the named plaintiff[ ] actually relied upon

14   the allegedly misleading statements filed with the SEC.” Genentech, 1989 WL 106834, at *5.

15   The Complaint does not identify the specific misstatements upon which the lead plaintiff actually

16   relied. Suprema, 334 F. Supp. 2d at 661 (plaintiffs must identify the specific misrepresentations

17   on which they relied); see In re Digi Int’l, Inc. Sec. Litig., 6 F. Supp. 2d 1089, 1103 (D. Minn.

18   1998), aff’d, 14 Fed. Appx. 714 (8th Cir. 2001). Nor does it identify any class members who

19   read and relied on any of the alleged misstatements, or identify the specific statements relied on

20   by those unidentified class members. Plaintiffs’ allegations are wholly deficient.

21
        11
            Although the Court deferred ruling on whether a Section 18 claim may be maintained as a
22   class claim, (Order at 13 n.7), courts in this Circuit have recognized that “Section 18 reliance
     cannot be proven on a class basis.” In re American Cont’l Corp./Lincoln Sav. & Loan Sec.
23   Litig., 794 F. Supp. 1424, 1438 (D. Ariz. 1992). Moreover, counsel for plaintiffs here has
     acknowledged that prevailing law does not permit claims under Section 18(a) to be brought as
24   class actions. See Stuart M. Grant & Megan D. McIntyre, Class Certification and Section 18 of
     the Exchange Act, 35 The Review of Securities & Commodities Regulation: An Analysis of
25   Current Laws & Regulations Affecting the Securities & Futures Industries 255 (2002)
     (acknowledging that the majority rule is that Section 18(a) claims are not available for class
26   actions) (Ex. F); Stuart M. Grant, The Institutional Investor’s Silver Bullet for Financial Fraud –
     Section 18, 1136 PLI/Corp 377, 384 (1999) (“[C]lass actions under section 18 are not
27   available.”) (Ex. E).
28
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 1   IX.    PLAINITFFS HAVE NOT STATED A CLAIM FOR INSIDER TRADING

 2          Plaintiffs continue to assert Section 20A insider trading claims against Messrs. Barsema,

 3   Garg, Gentner, Kruep, Kurtz, Lamond, Ragavan and DeNuccio. See ¶¶ 501-14. Section 20A of

 4   the Securities Exchange Act provides that:

 5          Any person who violates any provision of this chapter or the rules or regulations
            thereunder by purchasing or selling a security while in possession of material,
 6          nonpublic information shall be liable . . . to any person who, contemporaneously
            with the purchase or sale of securities . . . has purchased . . . or sold . . . securities
 7          of the same class.

 8   15 U.S.C. § 78t-1(a).

 9          Plaintiffs’ insider trading allegations remain fundamentally unchanged. As defendants

10   have explained in previous motions to dismiss, the insider trading claims fail because (1) they

11   have not stated a claim for a predicate violation of a securities law, (2) they do not have standing

12   to bring an insider trading claim, and (3) they have not pleaded insider trading with particularity.

13          A.      Plaintiffs Have Not Alleged a Predicate Violation of the Securities Laws

14          “A careful parsing of the somewhat tangled initial sentence of [Section] 20A discloses

15   that an insider – one who trades while in the possession of material, nonpublic information – is

16   liable only where an independent violation of another provision of the securities laws has

17   occurred.” In re VeriFone Sec. Litig., 784 F. Supp. 1471, 1488 (N.D. Cal. 1992), aff’d, 11 F.3d

18   865 (9th Cir. 1993); see also Order at 12 (holding that plaintiffs’ Section 20A claim is “subject to

19   dismissal [because p]laintiffs have failed to allege a predicate violation of the Exchange Act”).

20   Since plaintiffs still have not stated a claim against any of the defendants for violations of the

21   securities laws, the Section 20A claims should be dismissed. See In re VeriFone Sec. Litig., 11

22   F.3d 865, 872 (9th Cir. 1993).

23          B.      Plaintiffs Do Not Have Standing to Bring a Claim of Insider Trading

24          Plaintiffs also lack standing to pursue the Section 20A claim. Only a person “who traded

25   contemporaneously with the insider” has standing to assert a claim under Section 20A.

26   Neubronner v. Milken, 6 F.3d 666, 670 (9th Cir. 1993). Numerous courts have applied

27   “contemporaneous trading” restrictively to mean that plaintiffs asserting a Section 20A claim

28   must have traded on the same day as defendants. See In re AST Research Sec. Litig., 887 F.
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 1   Supp. 231, 233 (C.D. Cal. 1995) (dismissing all non-same day insider trading claims); In re

 2   Aldus Sec. Litig., [1992-1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,376, at 95,987

 3   (W.D. Wash. Mar. 1, 1993) (same); In re Stratus Computer, Inc. Sec. Litig., CIV. A. 89-2075,

 4   1992 WL 73555, at *6 (D. Mass. Mar. 27, 1992) (standing to assert insider trading claim is

 5   absent where no same day trading). See also Buban v. O’Brien, No. C94-0331, 1994 WL

 6   324093, at *3 (N.D. Cal. June 22, 1994) (plaintiff “could not have traded with defendant” where

 7   the purchase was three days after defendant’s sale). This Court, too, has already expressed its

 8   inclination to require same day trading. See Order at 12.

 9          Here, in a separate exhibit to the Complaint titled “Contemporaneous Trading,” plaintiffs

10   list various trades over a three-year period suggesting that CRP&TF and other purported

11   members of the putative class traded contemporaneously with defendants. See Pl. Ex. B.

12   Plaintiffs’ exhibit is self-defeating. First, it does not list any sales by Mr. Lamond or any same

13   day trades between CRP&TF or any purported class members and Messrs. Kruep and Ragavan,

14   compelling dismissal of insider trading claims against those defendants. Id. Second, the only

15   same day trades associated with Messrs. Gentner and DeNuccio are with purported class

16   members, not the representative plaintiff CRP&TF. Id. Similarly, five of the seven same day

17   trades associated with Mr. Garg are with a purported class member, not the representative

18   plaintiff CRP&TF. Id. It is “fundamental that named plaintiffs who seek to represent a

19   purported class must demonstrate that they themselves were injured, not that injuries have been

20   suffered by other, unidentified members of the class.” Aldus, [1992-1993 Transfer Binder] Fed.

21   Sec. L. Rep. (CCH) at 95,987 (citations omitted). Thus, the insider trading claims against

22   Messrs. Gentner, DeNuccio and Garg based upon same day trades with purported class members

23   should also be dismissed.

24          This leaves only three same day trades. See Pl. Ex. B (Mr. Barsema’s alleged trade on

25   8/3/00 and Mr. Garg’s alleged trades on 11/8/00 and 2/22/01). For same day trades, however,

26   where the price at which the defendant sold differs from the price at which plaintiff purchased,

27   any inference of inference of contemporaneous trading is undermined. See Buban, 1994 WL

28   324093, at *3; In re MicroStrategy Inc. Sec. Litig., 115 F. Supp. 2d 620, 664 (E.D. Va. 2000)
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 1   (purchase three days after sale and at price two dollars lower than sales price is not

 2   contemporaneous). For example, in Buban, where the defendant sold his shares at $1.50 more

 3   than what the plaintiff paid, the Court concluded it was “clear that plaintiff could not have traded

 4   with defendant.” 1994 WL 324093, at *3.

 5          As in Buban, the November 8, 2000 sale by Mr. Garg and purchase by CRP&TF is

 6   clearly not contemporaneous because CRP&TF purchased its shares for $1.71 less than Mr.

 7   Garg’s per share sales price. See Pl. Ex. B. Similarly, for the remaining two same day trades,

 8   the prices at which Messrs. Barsema and Garg sold and the prices at which CRP&TF purchased

 9   also undermine any inference of contemporaneous trading. Plaintiffs allege that on August 3,

10   2000, Mr. Barsema sold 50,000 shares at $113.53 per share, and CRP&TF purchased 5,100

11   shares at $123.04 per share. Id. They also allege that on February 22, 2001, Mr. Garg sold

12   37,500 shares at $29.50 per share, and CRP&TF purchased 12,500 shares at $30.88 per share.

13   Id. The prices that CRP&TF paid for its purchases on August 3, 2000 and February 22, 2001

14   exceed the prices at which Messrs. Barsema and Garg sold on those dates, respectively, by $9.51

15   and $1.38 per share. Id. These price discrepancies make clear that CRP&TF did not trade with

16   either Mr. Barsema or Mr. Garg on these dates. See Buban, 1994 WL 324093, at *3;

17   MicroStrategy, 115 F. Supp. 2d at 664; AST, 887 F. Supp. at 234.

18          Thus, because plaintiffs have not alleged contemporaneous trading, they lack standing to

19   pursue claims of insider trading. In the class action context, “[w]here a plaintiff lacks standing to

20   bring a claim personally, that plaintiff cannot represent the class.” VeriFone, 784 F. Supp. at

21   1489; see In re Seagate Tech. II Sec. Litig., C-89-2493, 1990 WL 134963, at *13 (N.D. Cal. June

22   19, 1990), aff’d, 98 F. 3d 1346 (9th Cir. 1996). Accordingly, these claims should be dismissed.

23          C.      Plaintiffs Have Not Alleged a Claim for Insider Trading With Particularity

24          Despite numerous opportunities to amend their pleadings, Plaintiffs have not alleged

25   insider trading with particularity in any event. See Shurkin v. Golden State Vintners, Inc., C O4-

26   3434, 2005 WL 1926620, at *15 (N.D. Cal. Aug. 10, 2005). A plaintiff must “allege specifically

27   what information [defendant] obtained, when and from whom he obtained it, and how he used it

28   for his own advantage.” Neubronner, 6 F.3d at 672. Specifically, the Ninth Circuit requires that
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 1   a plaintiff plead how the trade was made on the basis of inside information; it is not enough to

 2   simply allege that defendant was in possession of inside information. United States v. Smith, 155

 3   F.3d 1051, 1070 n.28 (9th Cir. 1998); SEC v. Truong, 98 F. Supp. 2d 1086, 1095 (N.D. Cal.

 4   2000).

 5            Plaintiffs did not meet these pleading standards in the Third Amended Complaint, (see

 6   Order at 12), and they do not meet them here. They allege in conclusory fashion that defendants

 7   sold stock “while in possession of material, adverse, non-public information.” ¶ 513. That is not

 8   enough. Plaintiffs must plead particularized facts showing what the trading defendants knew and

 9   when they knew it. Plaintiffs provide no factual basis, for example, to presume that outside

10   directors such as Mr. Garg had possession of and improperly used inside information about

11   alleged related agreements and technical defects in Redback’s products. Plaintiffs’ failure to

12   plead these requisite facts warrants dismissal of their insider trading claims.

13   X.       THIS ACTION SHOULD BE DISMISSED WITH PREJUDICE

14            The FAC represents plaintiffs’ fifth attempt to state a claim for relief. Plaintiffs have had

15   more than enough opportunities to attempt to sufficiently plead a claim here.

16            Notwithstanding the fact that the Court’s most recent Order identified numerous defects

17   in plaintiffs’ prior pleading and gave plaintiffs yet another opportunity to amend to cure those

18   defects, plaintiffs have failed to fix their fatally flawed complaint. “The general rule that parties

19   are allowed to amend their pleadings does not apply to actions in which the amendment would be

20   an exercise in futility, or in which the amended complaint would also be subject to dismissal.”

21   In re Fritz Cos. Sec. Litig., 282 F. Supp. 2d 1105, 1111 (N.D. Cal. 2003). A court’s “‘discretion

22   to deny leave to amend is particularly broad where plaintiff has previously amended the

23   complaint.’” Vantive, 283 F.3d at 1097-98 (citation omitted); see also In re Gilead Scis. Sec.

24   Litig., No. C03-4999, 2006 WL 1320466, at *9 (N.D. Cal. May 12, 2006).

25            The Complaint suffers from numerous defects that simply cannot be cured by further

26   amendment. For example, plaintiffs cannot cure their statute of limitations allegations without

27   pleading themselves out of loss causation and cannot cure their loss causation allegations without

28   pleading themselves into a statute of limitation bar. See supra Sections III-IV. The Section 18
     REDBACK DEFS.’ NOTICE OF MOT. &                   -34-                   C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF        Document 235         Filed 07/10/2006       Page 42 of 43



 1   claims cannot be cured by further amendment because, inter alia, plaintiffs may not assert a

 2   Section 18 claim on behalf of a class as a matter of law. See Section VIII, supra. And,

 3   plaintiffs’ insider trading claims cannot be saved by further amendment because the factual

 4   allegations in the existing Complaint establish that the named plaintiff does not have standing to

 5   assert such claims. See Section IX, supra. None of these defects is due to a mere lack of

 6   particularity. These defects, among others, go to the underlying factual assertions and legal

 7   theories of the case. No amount of “additional evidence” can be pleaded to cure these

 8   fundamental defects.

 9          Plaintiffs’ repeated and continuing failure to state a viable claim for relief shows that

10   further amendment would be futile. This action should be dismissed with prejudice.

11                                            CONCLUSION

12          For the foregoing reasons, defendants respectfully request that the Court dismiss this

13   action with prejudice.

14

15   Dated: July 10, 2006                          WILSON SONSINI GOODRICH & ROSATI

16                                                 Professional Corporation

17
                                                   By: /s/ Steven D. Guggenheim
18                                                      Terry T. Johnson
                                                        Steven D. Guggenheim
19
                                                   Attorneys for Defendants Kevin A. DeNuccio,
20                                                 Pierre R. Lamond, Thomas L. Cronan III, Vinod
                                                   Khosla, Dennis P. Wolf, Vivek Ragavan, Dennis L.
21                                                 Barsema, Gaurav Garg, William H. Kurtz, Craig
                                                   Gentner, Promod Haque and Randall Kruep
22

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     REDBACK DEFS.’ NOTICE OF MOT. &                  -35-                  C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)
     Case 5:03-cv-05642-JF       Document 235      Filed 07/10/2006     Page 43 of 43



 1                                        *    *          *   *

 2          I, Cameron P. Hoffman, am the ECF User whose identification and password are being

 3   used to file this Redback Defendants’ Notice of Motion and Motion to Dismiss Fourth Amended

 4   Consolidated Complaint; Memorandum of Points and Authorities in Support Therof. In

 5   compliance with General Order 45.X.B, I hereby attest that Steven D. Guggenheim has

 6   concurred in this filing.

 7   Dated: July 10, 2006                      WILSON SONSINI GOODRICH & ROSATI
                                               Professional Corporation
 8

 9                                             By: /s/ Cameron P. Hoffman
                                                    Cameron P. Hoffman
10
                                               Attorneys for Defendants Kevin A. DeNuccio,
11                                             Pierre R. Lamond, Thomas L. Cronan III, Vinod
                                               Khosla, Dennis P. Wolf, Vivek Ragavan, Dennis L.
12                                             Barsema, Gaurav Garg, William H. Kurtz, Craig
                                               Gentner, Promod Haque and Randall Kruep
13

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     REDBACK DEFS.’ NOTICE OF MOT. &               -36-               C:\NrPortbl\PALIB1\MSTI\2910175_4.DOC
     MOT. TO DISMISS; MEMO. OF P. & A.,
     CASE NO. C 03-05642 JF (HRL)

								
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